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Business Watch: August 12, 2003

12 August 2003, Volume 3, Number 30
Embattled oil major Yukos announced in a 6 July press release that core shareholders in Yukos and Sibneft have agreed on a dividend policy for YukosSibneft. Set to be created by year's end, YukosSibneft will pay quarterly and annual dividends of "no less than 40 percent of net profit as calculated by U.S. GAAP standards." Both companies are known for their generous dividend policies -- Yukos paid out $700 million last year, and Sibneft rewarded shareholders with $1.09 billion, a full 100 percent of its net profit. An 8 August editorial in "Vedomosti" noted that the companies' eye-catching dividend policies also serve to draw attention to the tax minimization strategies that ensure maximum profits and payouts. The editors chided the oilmen, concluding, "The [state] budget could receive more if the oligarchs didn't get carried away with [tax] privileges. Shareholders of YukosSibneft should take note." DK

Rosneft announced on 4 August that it is pulling out of its coal joint venture with Sergei Pugachev's International Industrial Bank (Mezhprombank), "Gazeta" reported the next day. According to Rosneft spokesman Dmitrii Panteleev, the state-owned oil company decided to leave the Russian Coal project because the joint venture has failed to acquire any actual coal-industry assets since its creation in February 2002. Russian Coal head Vadim Varshavskii disputed this in 5 August comments to "Vremya novostei," claiming that coal companies Rostovugol and Gukovugol are listed on the company's balance sheet, with ownership of other companies still being transferred. ("Kommersant-Daily" reported the same day, however, that Varshavskii himself left Russian Coal in July; according to the newspaper, Varshavskii confirmed that he is no longer involved in the project.) According to "Kommersant-Daily," Mezhprombank invested some $50 million into Russian Coal yet failed to gain control of significant production assets. Despite ambitious plans, the total annual production of companies controlled by Russian Coal was 12 million tons in 2002, a mere 5 percent of the 234 million tons produced nationwide, "Vedomosti" reported on 5 August. Rosneft's contribution was limited to the $2.5 million each company forked over for Russian Coal's charter capital. The question of exactly what is listed on the joint venture's balance sheet should become clearer when the two companies get around to liquidating the venture and divvying up its assets. DK

An Irkutsk arbitration court revived the conflict for control of the Korshunovskii Mining and Enrichment Plant (GOK) by appointing Aleksandr Alyukaev the plant's new external manager on 5 August, "Kommersant-Daily" reported the next day. The Federal Financial Recovery Service (FSFO) has been trying to collect on the plant's 1.8 billion ruble ($59 million) debt to the state. Mechel Steel Group, the current owner, claims that the FSFO is trying to seize it for subsequent sale to Mechel competitor Evrazholding. The two sides had reached a tentative agreement, but the court's appointment of a new, pro-FSFO external manager appears to set the stage for more strife. Mechel Director Aleksei Ivanushkin told "Vedomosti" of 6 August that Mechel considers Alyukaev's appointment illegal and plans to appeal it. For her part, FSFO head Tatyana Trefilova claimed that Alyukaev would soon begin work. Therein lies the danger, as Mechel spokesman Viktor Novichkov told "Kommersant-Daily," "We do not intend to let the manager into the plant until his legitimacy has been proven." Previous attempts by the FSFO to install a friendly manager have led to violent clashes with Mechel supporters, who maintain physical control of the plant. At least two reports -- in "Nezavisimaya gazeta" and -- noted that an increased militia presence in the area was fueling rumors of an impending attempt by the FSFO to seize control of the plant. DK

The Gorkii Automobile Plant (GAZ) announced on 5 August that Iraq will honor a 44 million euro ($50 million) contract for 5,000 Volga passenger cars, RIA-Novosti reported the same day. GAZ Deputy Director Viktor Maslennikov told journalists that he expected the remaining "technical questions" to be resolved within a month and that a shipment of nearly 500 cars was ready for delivery to Iraq. The first shipment, originally slated for March, was derailed by the U.S.-led war to topple former Iraqi President Saddam Hussein and the confusion after the regime's fall. In a related development, the Ural Automobile Plant announced on 5 August that the company is reopening its representative office in Iraq, Interfax reported the same day. Yevgenii Satanovskii, president of the Institute of Israeli and Middle Eastern Studies, told RBC in a 5 August interview that the revived GAZ contract indicates that Russian firms will be able to "build new ties to the Iraq market." Satanovskii noted, "It's strategically important [for the Americans] that more than just an American presence be felt on Iraqi soil." A 6 August editorial in "Vedomosti" was less optimistic, commenting that, despite the automotive breakthroughs, "there is no encouraging news on Russian companies' oil contracts." DK

The St. Petersburg Prosecutor-General's Office ended a long-running dispute between shipbuilders Severnaya Verf and Baltiiskii Zavod with an injunction ordering Baltiiskii Zavod to deliver two contracted boilers, "Kommersant-Daily" reported on 4 July. The row, which had endangered a $1.4 billion contract to build two destroyers for China, grew out of a feud over the original contract, which was eventually awarded to Severnaya Verf. Baltiiskii Zavod upped the ante on the tiff earlier this year when it refused to deliver two boilers to Severnaya Verf. Baltiiskii Zavod claimed to be dissatisfied with Severnaya Verf's substandard construction practices. Severnaya Verf cried foul, but the project idled, since Baltiiskii Zavod is a monopoly producer of engine-room boilers. Yelena Ordynskaya, senior assistant to the St. Petersburg prosecutor, told "Vedomosti" on 4 August that the Prosecutor-General's Office was forced to intervene to safeguard the state's interest in a contract with implications for Russian-Chinese relations. The newspaper's editors expressed their disapproval of this new role for the Prosecutor's Office in a same-day editorial, arguing, "Now, it seems, anyone who doesn't know how to draw up decent contracts can turn for help to the prosecutor." Deputy Premier Boris Aleshin put the final touch on the reconciliation with a 7 August meeting at which the shipbuilders' owners -- IST Group (Baltiiskii Zavod) and Mezhprombank (Severnaya Verf) -- agreed to bury the hatchet and deliver the two destroyers on time. DK

Mining powerhouse Norilsk Nickel outbid its rivals in a 6 August auction to privatize the state's 38 percent stake in the Matrosov Gold Mine, ABN reported the same day. The winning bid of 1.033 billion rubles ($34 million) was 12.5 times the opening price of 81.483 million rubles, providing a rare display of fiercely competitive bidding at a privatization auction. (Two previous privatization auctions -- for oil company Slavneft and insurer Rosgosstrakh -- produced lackluster bidding and lively allegations of collusion.) The struggle for the Matrosov Gold Mine unfolded between Norilsk Nickel and an alliance of Russia's Susumanzoloto and Britain's Peter Hambro Mining. Matrosov's chief asset is its license to the Natalkin gold field, which some believe could hold up to 800 tons of gold, Rosbalt reported on 6 August. Norilsk Nickel Deputy Chairman Maksim Finskii told "Vedomosti" on 7 August, "Thirty-four million dollars is a good price. We feel that Natalkin's reserves have been underestimated." Norilsk Nickel now plans to increase its ownership of Matrosov to 100 percent. Unconfirmed reports indicate that Norilsk Nickel had already bought up 25-30 percent of the mine's shares before the auction, "Vremya novostei" reported on 7 August. The Matrosov acquisition fits in with Norilsk Nickel's plans to up its gold interests and diversify its production to reduce the company's vulnerability to fluctuations on world metals markets. DK

A Moscow arbitration court ruled on 7 August that Finland's Suomen Gallup does not own the rights to the Gallup name in Russia, reported the next day. The decision means that Russia's TNS Gallup Media and TNS Gallup AdFact -- both part of the international market research group Taylor Nelson Sofres (TNS) -- might face a challenge from U.S.-based The Gallup Organization over the use of the Gallup name. The Finnish company, which has the undisputed right to the use of the Gallup name in Finland, expanded to Russia in 1991, "Gazeta" reported on 8 August; TNS bought out the Finns and their Russian business in 2001. According to "Kommersant-Daily," TNS Gallup Media and TNS Gallup AdFact are Russia's top media- and advertising-research firms, with a market share in excess of 50 percent. Previous attempts by The Gallup Organization -- which does not perform media research -- to secure the rights to its name in Russia have been unsuccessful. Alec Gallup, son of Gallup founder George Gallup Sr., was present in Moscow for the court decision. He announced that The Gallup Organization intends to conduct political and social research in Russia, "Izvestiya" reported on 5 August. TNS Gallup AdFact Director Ruslan Tagiev told in a 9 August interview that his company considers its use of the Gallup name in Russia legally justified. Tagiev accused his company's competitors of exploiting the case to undermine TNS Gallup's professional reputation in the run-up to a 30 November tender to measure television ratings. DK

Alfa Group subsidiary Alfa Echo announced in a 5 August press release its acquisition of LV Finance, which in turn controls 25.1 percent of third-place cellular operator MegaFon. With Alfa Group already controlling a blocking stake in second-place operator VimpelCom, the addition of a blocking stake in MegaFon could have profound implications for the telecom industry. Telecominvest, which holds a 31 percent stake in MegaFon, reacted angrily to the news. Telecominvest Director Maksim Gorokhov told "Kommersant-Daily" on 6 August, "We can't accept a situation where one of our partners sells his stake to our competitors without discussing it with the remaining shareholders." The deal immediately touched off speculation of an impending move by Alfa to consolidate its holdings in VimpelCom and MegaFon to challenge Mobile TeleSystems (MTS). Vyacheslav Nikolaev, vice president of the research department at Trust Bank, told "Vedomosti" of 6 August, "A MegaFon-VimpelCom merger is one of the most obvious possibilities for Alfa." Taken together, the two companies would have a leading 47 percent market share and 12.6 million subscribers, as against MTS's current 37 percent market share and 11.7 million Russian subscribers. It would cost Alfa Group hundreds of millions of dollars to up its blocking stakes to controlling stakes, but the money is there -- Alfa recently received more than $2 billion in cash from British Petroleum for half of Tyumen Oil Company (TNK). DK

Second-place cellular operator VimpelCom announced in a 1 August press release that its board of directors has appointed Aleksandr Izosimov to be the company's new CEO as of 1 October. Outgoing CEO Joe Lunder plans to return to his native Norway but will stay on at the company as chairman of the board. The 39-year-old Izosimov, who holds an MBA from INSEAD, leaves a position as Mars Inc.'s regional president for the CIS, Central Europe, and Scandinavia. Before arriving at Mars in 1996, Izosimov worked at McKinsey & Co. in Stockholm for five years. Izosimov comes to VimpelCom as a double outsider, hailing from outside the company and outside the telecommunications industry. Konstantin Chernyshev, head of the analytical department at NIKoil, told "Vedomosti" of 4 August that the appointment of a Russian "reflects a strengthening of Alfa's influence at VimpelCom." Russia's Alfa Group and Norway's Telenor each own blocking stakes in VimpelCom. reported on 1 August that Izosimov was a compromise candidate: "Alfa Group has been dissatisfied that virtually all of the power at VimpelCom belongs to the Norwegians and they insisted that a Russian be appointed to the post of director.... The choice fell on a Russian manager with extensive experience in the West and a positive attitude toward foreigners." DK

"RFE/RL Business Watch" presents the main events and comments in the ongoing standoff between oil major Yukos and the Prosecutor-General's Office.

5 August: Christof Ruehl, the World Bank's chief economist for Russia, tells "Vedomosti": "Not changing the privatization -- in other words, an amnesty for all the done deals -- is very bad from the point of view of support for market reforms. If this question isn't resolved, it will keep acquiring a political dimension. Deals in which there were particularly criminal actions need to be reexamined."

6 August: Yukos head Mikhail Khodorkovskii tells Britain's "Financial Times" that the planned merger of Yukos and Sibneft triggered the campaign against Yukos.

6 August: Representatives of the Prosecutor-General's Office and the Federal Security Service search the offices of Yukos-Moscow, "Vedomosti" reports the next day. The search targets the former offices of Apatit-Trade. A key case against Yukos core shareholder Platon Lebedev involves the theft of a 20 percent stake in fertilizer producer Apatit.

7 August: A Moscow city court rejects an appeal by lawyers for Aleksei Pichugin seeking to void the results of a 19 June search of Pichugin's apartment and office, reports. Pichugin, who heads a security department at Yukos, was arrested on 19 June on a murder charge.

11 August: Britain's "Financial Times" reports that Yukos CEO Mikhail Khodorkovskii plans to increase his support for pro-market political parties Union of Rightist Forces (SPS) and Yabloko. The newspaper also reports that Chukotka Governor and Sibneft top shareholder Roman Abramovich is "stepping up efforts to liquidate his investments in Russia." DK