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Business Watch: August 26, 2003

26 August 2003, Volume 3, Number 32
Semyon Vaynshtok, president of Russia's state-owned pipeline monopolist Transneft, told Russian President Vladimir Putin at an 18 August meeting that the nation's pipeline network is keeping up with the oil companies' booming production, "Izvestiya" reported on 19 August. According to Vaynshtok, rumors of insufficient pipeline capacity are exaggerated. Transneft Vice President Sergei Grigorev told the newspaper that, despite oil company claims of pipeline bottlenecks, Transneft received 550,000 metric tons less oil in July than oil companies had said they were going to pump into the system. Troika Dialog analyst Valerii Nesterov told "Vremya novostei" on 19 August that the situation is not quite so simple. "Transneft certainly has extra capacity at some spots in the system," the analyst explained, "but there's a shortage of capacity on export routes." Indirect confirmation comes in the form of a 21 August report in "Vedomosti" that Tatneft plans to spend no less than $130 million on its own fleet of 4,500 railway tank-cars to haul oil. Valerii Matveev, who works in Tatneft's investment department, told the newspaper, "Pipelines are the most advantageous form of transport, but what do we do if Transneft's capacity is limited?"

A seeming contradiction between Sibneft's financial results for the first half of 2003 and the company's dividend plans throw light on accounting and tax nuances. Sibneft's unconsolidated results to Russian accounting standards for the first half of 2003 showed a 623.9 million ruble ($20.6 million) loss, Reuters reported on 19 August. Meanwhile, the company's September shareholders' meeting is set to approve a $1.006 billion interim dividend payment...for the first half of 2003. The money needed to pay the dividends will "arrive," a company source told "Kommersant-Daily" on 18 August, when the profits of oil trader Rubicon are added to the company's balance sheet at the same 15 September shareholders' meeting that will approve the $1 billion interim dividends. Metropol analyst Evgenii Satskov explained the nuts and bolts to "Nezavisimaya gazeta" on 19 August: "Company A [Sibneft] sells its affiliate B [Rubicon] oil at $5 a barrel. Company B sells it at a market price of $30 a barrel. The bulk of the company's profit is consolidated on company B's balance sheet." The arrangement, which is legal under Russian law, allows companies to minimize their tax burden by creating trading companies that enjoy numerous tax benefits. The discrepancy -- between a paper loss and a huge dividend payment on real profits -- vanishes under international accounting standards.

A 19 August municipal bond offering organized by Trust Bank for Moscow Oblast went somewhat awry, leaving the bank to make amends and offer explanations. Trust Bank had told its clients to expect a 14 percent annual yield on the four-year, 4 billion ruble ($132 million) bond, ABN reported on 20 August. Things did not go according to plan, however, and the yield at the cut-off price came out to 15.9 percent (or 87.44 percent of par) instead of 14 percent (or 92.34 percent of par); the weighted average yield was 15.18 percent. In other words, some investors paid 920 rubles for a bond they could have obtained for 870 rubles. As a compensatory measure, Trust Bank made a 910 ruble per bond buy-back offer (the equivalent of a 14.1 percent yield) to those who had paid 920 rubles or higher. Trust Bank presented its position in a harshly worded 21 August press release, stating that the bank lost money on the offering and had objected to the decision to set the cut-off price at 15.9 percent. The statement concluded: "We have grown used to relying on the trustworthiness of our partners and their good word. As it so happens, this was incorrect." Market professionals queried by "Kommersant-Daily" on 21 August and "Vedomosti" on 22 August were cautious about assigning blame for the confusion, but unanimous in pointing to poor communication between Trust Bank and other members of the syndicate responsible for the bond offering.

Russian Prime Minister Mikhail Kasyanov signed an order on 18 August recommending Vladislav Menshchikov to head state-owned defense-industry consortium Almaz-Antei, "Izvestiya" reported the next day. Currently the deputy director of the State Reserves Agency, Menshchikov is a 44-year-old St. Petersburg native and Federal Security Service (FSB) veteran with close ties to Viktor Ivanov, deputy head of the presidential administration. Between 1997 and 2002, Menshchikov occupied high positions in the St. Petersburg branches of the Central Bank and Federal Securities Commission. Almaz-Antei, which specialists in antiaircraft missile systems, was created by presidential decree in April 2002. According to "Vedomosti," it brings together the state's holdings in 46 companies with total export contracts of more than $1 billion, although the holding company does not control those revenues. Almaz-Antei's management has had difficulty integrating the holding's assets into a single structure with central control over the revenues of individual enterprises. Acting Director Igor Klimov was shot to death in Moscow in June 2003 in a crime that remains unsolved. An anonymous source at Almaz-Antei told "Izvestiya" that Menshchikov should expect that same sort of conflicts with individual enterprise directors that dogged Klimov. Konstantin Makienko of the Center for the Analysis of Strategies and Technologies concurred, telling "Vedomosti" on 19 August that Almaz-Antei's overly complex structure guarantees "objective difficulties."

A deal to acquire a controlling stake in fertilizer manufacturer Azot has collapsed amid mutual recriminations. Mikhail Golubev, CEO of Neftegazbank, told Rosbalt on 19 August that his bank paid $45 million to companies controlled by Azot President Georgii Briling, yet failed to receive in return an agreed-upon 53 percent stake in Azot. For its part, Azot announced on 19 August that it cancelled the sale because Neftegazbank never paid for the shares, "Kommersant-Daily" reported the next day. And the conflict doesn't end there. Briling gained control of Azot, formerly a Gazprom subsidiary, in February 2003; the natural gas monopolist has since been trying to regain control of Azot from Briling, whom it refuses to recognize as the company's head. News that the little-known Neftegazbank was to buy a controlling stake in Azot came in early June, just as Gazprom appeared to be on the verge of regaining control over its wayward subsidiary. "Kommersant-Daily" opined that the new conflict, which threatens to envelop Azot in a litigious fog, could be "a ruse by Briling to fend off Gazprom's claims." "Vedomosti" reported on 19 August that Briling now intends to reopen negotiations with Gazprom. Sources in the natural gas behemoth told the newspaper that they hold to their previous positions: Briling is not the legitimate president of Azot, the conflict between Azot and Neftegazbank does not interest Gazprom, and Gazprom will continue its legal efforts to bring Azot back into the fold.

Aircraft corporation MiG has signed the first contracts to lease its TU-334 passenger jets, "Vremya novostei" reported on 18 August. Moscow-based airlines Atlant-Soyuz and Aerofrakht will each lease five aircraft for 10 years beginning in 2005 at a price of $12.9 million per plane, making the contracts worth $129 million. An unusual feature of the leasing arrangement is the absence of a leasing company -- Atlant-Soyuz and Aerofrakht will lease the aircraft directly from MiG. Noting that Atlant-Soyuz is the official airline of the city of Moscow, "Kommersant-Daily" reported on 16 August that Moscow Mayor Yurii Luzhkov lent his support to the deal. MiG had initially hoped to get at least $17 million for each 100-seat plane, but a recent marketing study pointed to $12 million-$13 million as a more realistic price, "Vremya novostei" reported. At the reduced price, MiG will have to produce and sell 100 planes in order to make money, leading some observers to question the project's viability. A Siberia Airlines representative told "Vedomosti" on 18 August that MiG "failed to conduct the necessary market research and didn't establish how much actual demand there is for these aircraft."

Aircraft builder Irkut and the Yakovlev design bureau announced on 20 August that they will merge over the next year and a half, "Gazeta" reported the next day. The resultant firm, tentatively named Irkut-Yak, will supply Irkut with in-house design specialists and produce Russia's first vertically integrated aircraft building company. According to Irkut Vice President Dmitrii Eliseev, the financial details of the merger will be ironed out by late October, "Vedomost" reported on 21 August. The merged company's main project will be the Yak-130 combat trainer, for which Irkut estimates worldwide demand of some $1.5 billion, "Kommersant-Daily" reported. A source in Rusaviakosmos, the Russian space agency, told "Gazeta" that the merger could be the first stage of a larger plan to give the state a controlling stake in Irkut and create a vast, state-owned aircraft construction powerhouse. A 19 August "Kommersant" report on the aviation industry noted that "consolidation [in the aviation industry] is for all practical purposes serving as a cover for deprivatization." At present, controlling stakes in both Irkut and Yakovlev belong to the management of the respective firms.

Leading cellular operator Mobile TeleSystems (MTS) announced in a 19 August press release that it has begun to operate in Saratov Oblast. With 15 base stations, the new MTS network can accommodate 150,000 subscribers. With a population of 2.7 million, nearly 2 million of whom live in urban areas, the region has only 230,000 cell phone users, a low penetration rate of 9 percent, Regnum reported on 19 August (the national average is 18.5 percent). Still, observers predict that tough competition promises an uphill battle for MTS. ACM Consulting Senior Analyst Anton Pogrebinskii told "Vedomosti" on 20 August that "in order to gain the largest subscriber base [in the region], MTS will have to get the lion's share of new clients and win over a significant number of subscribers from its competitors." According to "Vremya novostei," those competitors are MegaFon, with 105,000 subscribers in the region; VimpelCom, with 85,000; and local operator Smarts, with 20,000. Despite the competition, MTS seems to have gotten off to a good start. SaratovBusinessConsulting reported that when the company's offices opened up for business on 19 August, more than 500 people lined up down the block to sign up with the new kid, forcing the militia to close the street to traffic.

Kazakhstan's Kashagan oil field will begin producing oil only in 2007, two years later than the original target date of 2005, the "Financial Times" reported on 20 August. The delay is the result of bickering between participants in the $20 billion project and technical challenges. Ironically enough, one reason for the delay was a dispute between the Kazakh government and oil companies over drilling delays, "The Moscow Times" reported on 15 August. Both newspapers cite sources close to the project as saying that the parties have overcome their differences and are readying a statement that will own up to the delay and set a new target date for the first oil to flow. With some 9 billion barrels of recoverable reserves, Kashagan could make Kazakhstan one of the world's top five oil exporters. The project is being developed by a consortium of oil companies: Eni (project operator, 20 percent), ExxonMobil (20 percent), Royal Dutch/Shell (20 percent), Total (20 percent), ConocoPhillips (10 percent), and Inpex (8 percent).

The International Monetary Fund (IMF) vowed not to leave Georgia in the lurch even after the president of Georgia's National Bank warned that the country is lurching toward default on its foreign debt. National Bank head Nodar Managadze warned on 21 August that Georgia faces imminent default on its foreign debt because of a deadlocked parliament's refusal to sequester the budget. The IMF had set the sequester as a condition before pleading Georgia's case to the Paris Club of creditors. Without IMF intercession and a subsequent restructuring agreement, default is a near certainty. With parliamentary elections looming on 2 November, opposition parties have refused to approve the sequester, however. But State Minister Avtandil Jorbenadze had good news for journalists on 23 August, announcing that he had secured IMF support for a debt-restructuring deal with the Paris Club at a meeting with Jonathan Dunn, the IMF's representative in Georgia, Rosbalt reported the same day. A 23 August analysis of the situation by RossBusinessConsulting suggested that the crisis is primarily about a political tug-of-war between the government and the opposition: "[B]oth sides are overstressing the inevitability of a debt crisis, substituting mutual recriminations for an analysis of insufficient tax revenues and real measures to reform budgetary policy." Georgia's foreign debt currently stands at $1.75 billion, or 47 percent of the country's GDP.

Alfa Group is already one of Russia's heaviest financial-industrial hitters. Now, flush with cash from its sale of half of Tyumen Oil Company to British Petroleum, Alfa is positioning itself to become a dominant force in the telecom sector.

Alfa is no newcomer to the telecom business. Through subsidiary Alfa Echo, the group holds a blocking stake in VimpelCom, Russia's second-largest cellular operator. Alfa also controls a blocking stake in Golden Telecom, the country's largest independent fixed-line operator.

The first sign that Alfa was on the expansion path came with the company's bombshell 5 August announcement that it had acquired a blocking stake in third-place cellular operator, and VimpelCom competitor, MegaFon. Alfa announced no figures, but press estimates put the price of the deal at $200 million-$300 million. The acquisition opens the door to myriad possibilities, among them a VimpelCom-MegaFon merger to take over the top spot from AFK Sistema's Mobile TeleSystems. In the short term, it also increases Alfa's reach, since MegaFon has licenses to provide cellular services in all regions of Russia.

MegaFon's other shareholders objected strenuously, however, to what they saw as Alfa's gate crashing. In a statement on 11 August, Finnish-Swedish TeliaSonera (35.6 percent), St. Petersburg-based holding company Telecominvest (31.3 percent), IPOC International Growth Fund Limited (6.5 percent), and WestLink Ltd. (1.5 percent) huffed that they had learned of the deal from the press. They also pointed to an agreement, albeit of unclear legal status, that prohibited shareholders from selling or transferring shares to a competitor. The only problem is that the deal wasn't a cut-and-dried sale or transfer of shares. Instead, Alfa Echo bought LV Finance, which owns Transcontinental Mobile Investments, which owns CT Mobile, which owns the disputed 25.1 percent stake in MegaFon. In other words, more conflict may be in the offing once executives return from their August vacations.

The next development occurred on 19 August with the announcement that Golden Telecom had acquired 100 percent of fixed-line operator Combellga from Norway's Telenor. In return, Telenor received a 19.5 percent stake in Golden Telecom, a $160 million value at current market prices. Alfa Group's stake in Golden Telecom-Combellga is now 31.4 percent, "Kommersant-Daily" reported on 20 August. "Vedomosti" reported that, according to data from J'son and Partners, the acquisition will push Golden Telecom's share of Moscow's corporate telecommunications market from 12 percent to 18 percent.

Alfa's sudden rush to beef up its telecom portfolio suggests to some that group President Mikhail Fridman may have his eyes on the biggest unclaimed communications prize of all -- Svyazinvest. One quarter of the national fixed-line operator is slated for privatization in 2003, although persistent rumors hint at a delay, perhaps until 2005. For now, the state retains 75 percent of Svyazinvest. (Mustcom, a Cyprus-based investment consortium led by financier George Soros, paid $1.875 billion for a 25 percent plus one share stake in 1997.) And Fridman is on the record as having expressed interest.

Should a chunk of Svyazinvest go on the block, Alfa may already have its foot in the door. Alfa Bank is in the process of buying up Russia's Soviet-era sovereign debt and swapping it for the debts of Svyazinvest subsidiaries, "Vedomosti" reported on 18 August. The debt swap leaves Svyazinvest's regional telecoms owing Alfa Bank substantial sums. Rostelecom, for example, will owe Alfa Bank $100 million by the end of August, according to the newspaper.

The acquisition of debts can be an effective means of scaring off potential suitors in a privatization. Debts, after all, are among the least palatable strings one can attach to a potential purchase. A 21 August editorial in "Vedomosti" noted that Alfa has already succeeded in tying more than a few strings: "The trilateral deal with the Ministry of Finance and Vneshekonombank, in which Alfa Bank managed to buy up Soviet debt to Slovakia and swap it for the hard-currency debts of North-West Telecom and Rostelecom to the tune of $121 million, is a fine start. Next in line is Sibirtelecom, and then perhaps the rest of Svyazinvest's regional telecoms."

Then again, Alfa's current focus on telecommunications may not last. An anonymous industry source told "Profil," No. 31 (25 August) that Alfa is not really interested in Svyazinvest and intends to pull out of Golden Telecom within the next 12 months. According to the source, the decisive factor will be an alleged golden rule that appears to have served Fridman well in recent years: Get out of any business that doesn't guarantee you an annual profit of at least 50 percent.

Whatever the merits of the state's case against Yukos core shareholder Platon Lebedev, no one can dismiss it out of hand on purely visual grounds. Between 20 June, when the investigation was opened, and 21 August, when it was closed, a team of undoubtedly overworked prosecutors penned 146 volumes. And lest anyone doubt the magnitude of their achievement, "Izvestiya" informed its readers on 22 August that each volume contains 300 pages.

Lebedev, who has been behind bars since 2 July, faces four charges, according to fraud; infliction of damages through deceit or abuse of trust; failure to comply with a court decision; and tax evasion. The key accusation involves a 1994 privatization in which Lebedev allegedly helped to spirit away $280 million of the state's assets. Lebedev contests all of the charges.

Lebedev's lawyer, Evgenii Baru, told "Kommersant-Daily" on 23 August that the accused and his legal team will now set about studying the 146 volumes of case materials. Though that task will likely take some time, the next action looms on 2 September, when the court will consider whether or not Lebedev should remain in prison in the run-up to trial. In anticipation, Group Menatep -- the investment group Lebedev heads -- is already distributing bright-red "Free Platon Lebedev" T-shirts in Moscow, "Izvestiya" reports.

Even as the Lebedev case moved forward, events in Europe brought attention back to perhaps the most famous case of the Kremlin versus an oligarch -- that of Vladimir Gusinskii. Greek authorities detained the erstwhile media magnate on 21 August as he went through passport control at Athens airport. The exact reason for the arrest was not immediately clear, with conflicting reports claiming that Greek authorities had acted on either an outstanding Interpol warrant or a freshly minted Russian request.

Gusinskii's media empire -- which included television station NTV and a bevy of publications -- crumbled in 2000 under what some saw as a politically motivated assault by the Prosecutor-General's Office, and Gusinskii himself hightailed it to Spain after a brief stint in a Russian jail. Russian authorities tried unsuccessfully to have him extradited from Spain on embezzlement charges in 2001, and there ended the case, or so it seemed.

Gusinskii had long since slipped off the radar of Russian business and politics. Yet his unexpected detention, and in a country that has complied with several high-profile Russian extradition requests, touched off a firestorm of bemused speculation in the Russian press. For now, the only sure-fire bet is that the conjecture will intensify -- a Greek court ruled on 25 August to leave Gusinskii in jail pending extradition proceedings that are expected to last several weeks.