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Business Watch: September 9, 2003

9 September 2003, Volume 3, Number 34
Russian Deputy Natural Resources Minister Kirill Yankov told ecologists at a conference on 2 September that his ministry will likely reject a proposed oil pipeline project from Angarsk in Siberia to Daqing, China, Interfax reported the same day. Yankov's remarks added to the confusion over competing plans to expand Russia's export capacity in the east. Supported by oil major Yukos, the Angarsk-Daqing pipeline would run for 1,452 kilometers through Russia and 795 kilometers in China at a cost of $1.8 billion-$2 billion. A rival project supported by state-owned pipeline monopolist Transneft would traverse 2,047 kilometers in Russia and 795 kilometers in China at a cost of $3.5 billion-$5 billion, serving China through a branch pipeline to Daqing and Japan through the Russian port of Nakhodka. According to Yankov, the Natural Resources Ministry "does not recognize either project as acceptable" for environmental reasons, Interfax reported. (The ministry rejected the Angarsk-Nakhodka project on 27 July, although the decision has not yet been officially approved by Natural Resources Minister Anatolii Artyukhov, "Kommersant-Daily" reported on 3 September.) With a plethora of factors to consider and lobbying pressure coming in from all sides, the Russian government made a tentative decision in the spring to pursue the combined Angarsk-Nakhodka plus Daqing route. Observers were skeptical about the real relevance of environmental concerns. Troika Dialog analyst Valerii Nesterov told "Vedomosti" on 3 September, "The government can't make up its mind about who's going to build the pipeline, who's going to pay for it, and who it will belong to, so it's using the Natural Resources Ministry as a shield to cover up its own indecisiveness." For his part, Transneft vice president Sergei Grigorev told "Nezavisimaya gazeta" on 4 September that the ministry's specific objections may "fall away of their own accord" because other pipeline routes are still possible.

LUKoil announced in a 29 August press release that the company's board of directors has approved a new dividend policy that will direct at least 15 percent of the oil major's consolidated net profit under US GAAP (generally accepted accounting principles) standards to shareholders. LUKoil paid $550 million, or 29.8 percent, of its $1.843 billion 2002 profit in dividends, and $425 million, or 20.5 percent, of its $2.075 billion 2001 profit in dividends, AK&M reported. But the new policy marks the first time the company has made a prior commitment to a specific dividend benchmark. BrokerCreditService analyst Maksim Shein told "Vremya novostei" on 1 September, "We think this is a good amount that will ensure dividend returns of 3 percent-4 percent, which corresponds to the international average." Other analysts told "Vedomosti" on 1 September that LUKoil's dividend policy represents standard fare for Russian companies that "strive for high standards of corporate governance." (At the high end of the spectrum, YukosSibeft has promised to pay out no less than 40 percent of the company's net profit to GAAP standards in dividends.) LUKoil also announced that it intends to boost its output growth rate to 4 percent in 2004, Reuters reported.

The New Shipping Company (NPK) hopes to carve out a niche for itself on the market for oil deliveries by rail, ABN reported on 4 September. NPK plans to have a fleet of 3,000 railroad cars available for leasing by the end of the year to ship oil and light petroleum products, increasing its fleet to 10,000 by 2005. Structures affiliated with shipping company Severstaltrans and managers from MMK-Trans formed NPK, AK&M reported on 4 September. Severstaltrans spokeswoman Anna Vostrukhova told "Vedomosti" on 4 September that the company has already invested $90 million into NPK and hopes to grab as much as 20 percent of the Russian oil shipping market. But Petroleum Argus analyst Kirill Portnov told the newspaper that NPK may find it difficult to build up a steady business in a market where conditions can change rapidly. For example, falling oil prices or an increase in pipeline export capacity could undermine the economic viability of rail shipments. Still, NPK is not the only firm looking to get in on rail deliveries. Oil company Tatneft decided in August that it will invest $130 million into its own fleet of 4,500 railway cars for oil shipments by 2005, "Vedomosti" reported on 21 August.

Yukos announced in a 4 September press release that it has purchased a 20-percent-minus-one-share stake in Sibneft, moving the two companies' planned merger along at a brisk clip. According to the press release, the shares are subject to a lien until Yukos completes its cash payment. As part of the merger, Yukos is paying $3 billion in cash and 26.01 percent of its own shares for 92 percent of Sibneft. The cash payment and share swap should be finished by the end of September, "Nezavisimaya gazeta" reported on 2 September. "Vedomosti" reported the same day that "highly placed sources at Yukos" told the newspaper that the union is proceeding faster than expected against a backdrop of talks with Western oil powerhouses -- Royal Dutch/Shell, Chevron Texaco, TotalFinaElf, and ExxonMobil -- over the sale of a minority stake in the soon-to-be-created YukosSibneft.

The Finance Ministry announced in a 5 September press release that it has selected 55 companies out of 59 applicants hoping to manage citizens' pension funds. The four companies that were weeded out all posted losses in the last two years, violating a key criterion in what was billed as a "competition." The ministry required that companies seeking to act as pension fund managers have equity capital of 50 million rubles ($1.62 million) as of 1 August, assets of 100 million rubles, no losses or debts to the state budget over the last two years, and licenses to manage mutual funds, non-state pension funds, and investment funds. Behind the scenes, some grumbled that the requirements were insufficiently stringent, especially since newly created firms were allowed to take part in the contest. An anonymous ministry source told "Vedomosti" on 5 September, "There were a lot of newly created companies with obviously inflated capital and directors and employees hired part-time in July and August...but their documents were in order and there was no way to deny these companies access to pension funds." In theory, citizens now have until 15 October to select one of the 55 companies to manage their pension savings, or leave them by default to be invested by the state pension fund. That deadline may be extended, however. Future pensioners were supposed to receive a statement by 1 August from the state pension fund with a tally of their individual pension savings. To date, only 1.5 million of the 38 million notices have been mailed out, and the new deadline for sending them out is 1 November, "" reported on 8 September.

International ratings agency Standard & Poor's announced in a 2 September news bulletin that it has revised the ratings of 11 Russian banks to reflect "improvements in the economic and operating environment in Russia." The news bulletin painted a rosy picture: "The retail deposit market is booming, driven by individuals' increasing confidence in banks and the sector's aggressive pricing tactics to draw in funds. The result is a banking sector that by almost all measures has expanded 20%-40% per year since 1999, with no let up in sight." The agency was careful to balance the accolades with at least one brickbat, however. Unaddressed structural weaknesses and lackluster reforms mean that "upward potential for Russian bank ratings remains limited," according to S&P credit analyst Ekaterina Trofimova. S&P is not the only agency with an upbeat take on Russian banks. Moody's analyst Pavel Simacek told "Vedomosti" on 3 September, "Many [Russian banks] are demonstrating improvements in their work." Among the banks S&P upgraded were: Alfa Bank, MDM Bank, OJSC Commercial Bank, Petrocommerce Bank, International Industrial Bank, DeltaCredit Bank, and Surgutneftegazbank.

Oil major Yukos's Open Russia Foundation announced in a 4 September press release that it has obtained the rights to publish the weekly "Moscow News," a warhorse of perestroika that subsequently fell from prominence in the 1990s. Evgenii Kiselyov, who gained fame as an anti-Kremlin gadfly and all-round analytical impresario on independent television, will be the newspaper's new editor in chief. The two sides did not disclose the amount of the deal. Experts queried by "Kommersant-Daily" felt that the figure could be as low as tens of thousands of dollars. Viktor Shkulev, chairman of AFS Publishing, told the newspaper, "These brands aren't valuable from a commercial point of view." "Moscow News" publisher Kirill Legat told "Vremya novostei" that the Open Russia Foundation will give the newspaper an initial grant to improve its "rather difficult financial situation" in the hope that the project will eventually break even. While observers saw the acquisition of a media outlet as a natural move for Yukos, which has been the object of much unwanted scrutiny from the Prosecutor-General's Office over the last two months, some faulted the decision to acquire "Moscow News." Bakster Group political consultant Oleg Matveichev told "Vedomosti" on 5 September, "'Moscow News' is an old brand that was popular during perestroika. It's a symbol of the democratic revolution that took place, and Kiselyov fits in with that style. But [Yukos CEO Mikhail] Khodorkovskii would be better off linking himself with the future than privatizing relics of the past."

The Czech Republic's February decision to impose a 35 percent import duty on Russian ammonium nitrate has redounded to the detriment of Czech cars in a bit of tit-for-tat trade one-upmanship. Russia's Commission on Protective Measures in Internal Trade responded to the Czech measure on 2 September, recommending a 6 percent import duty on Czech-produced Skodas, reported on 4 September. The move, which could take effect by October or November, represents an escalation. According to "Vedomosti," Russian ammonium nitrate exports to the Czech Republic average $1.4 million a year, while Skoda imported more than $20 million worth of Octavias to Russia in the first half of 2003 alone. An added 6 percent import duty would have a disastrous effect on Skoda sales, observers agreed. Sergei Alekseichuk, a board member at the Avtomir dealership network, told "" on 1 September, "If they introduce this additional duty, it will take Skoda off the Russian market." For its part, Skoda could hit back by deciding to locate a planned factory to assemble Skodas in Kazakhstan instead of Russia, RBC reported on 5 September.

Top juice and dairy producer Wimm-Bill-Dann (WBD) announced its first-half 2003 financial results in a 2 September press release. Sales jumped 17 percent to $472 million, while net profit sank 21 percent to $17.7 million. Meanwhile, administrative expenses rose 27 percent to $38 million, and commercial expenses shot up 37 percent to $69 million. WBD chief financial officer Vladimir Preobrazhenskii told reporters at a 2 September briefing that the increased expenses came about as a result of the company's regional expansion campaign, "The Moscow Times" reported the next day. Aton analyst Aleks Kantarovich saw benefits down the road, telling RBC on 3 September, "In the short term, expansion lowers profitability, but in the end, when the growth process stabilizes and the company increases its sales, WBD's profits will increase sharply." One location where the company is still looking to expand its operations is Central Asia, where WBD already has a factory in Kyrgyzstan. According to Preobrazhenskii, WBD is eyeing production facilities in Kazakhstan and Uzbekistan, "Kommersant-Daily" reported on 3 September.

PR is a four-letter word in Russia. This is not to stress the perversity of public relations -- the Russian obscenity usually referred to by its quantity of letters is actually a three-letter word -- but the fact that "piar" (as the word, pronounced roughly like the English abbreviation "PR," is spelled in Russian) is not quite the same thing as PR. For reasons that have much to do with the Soviet Union's obsession with controlling what its citizens knew, the business of preparing and disseminating information for public consumption in post-Soviet Russia is anything but mundane. Piar has acquired an almost mystical aura, and its practitioners are often portrayed by the press as modern-day magicians who shape and channel society's emotions and desires. If the piar specialist is more than just a specialist in public relations, Vladimir Ruga is more than just a whiz at piar. Though he is only 33 years old, Ruga has already managed to fine-tune the image of prototypical oligarch Boris Berezovskii, oversee corporate public relations for next-generation oligarch (and governor of Chukotka Autonomous Okrug, not to mention new owner of the English soccer club Chelsea) Roman Abramovich, and even write a historical/financial thriller. Ruga is also the newly appointed vice president for public relations at TNK-BP, a recently created oil company that merges Russia's Tyumen Oil Company (TNK) and the Russian assets of British-American BP.

Ruga was educated as a historian at Moscow State Pedagogical University. After graduating he worked as a journalist and, at age 26, he became the deputy editor in chief of the newspaper "Vechernyaya moskva." In a life-changing career move, he accepted an invitation from Berezovskii in 1997 to head the PR department at the oil company Sibneft. Ruga remained at Sibneft as control of the company passed to Berezovskii protege Abramovich, and it is from Sibneft that Ruga arrives at TNK-BP.

Ruga's reputation in piar circles is legendary. "Gazeta" reported on 16 July 2003 that "one of his best 'projects' is Boris Berezovskii in the second half of the 1990s. It is primarily Ruga who created the image of the Berezovskii 'who influences everything under the sun.'" Nor did Ruga limit himself to corporate piar. "Vremya novostei" reported on 1 September that Ruga's political accomplishments include "the State Duma campaigns of both oligarchs [Berezovskii and Abramovich], the gubernatorial campaigns of Aleksandr Lebed, Leonid Polezhaev, and Roman Abramovich, and a role in the election campaign of [Kazakh President] Nursultan Nazarbaev."

Although his original mentor, Berezovskii, is now in self-imposed exile in London, Ruga appears to have floated from project to project without scandal or animosity. And some of those projects have undoubtedly left useful numbers in his Rolodex. According to a 15 September 2000 article in "Slovo neftyanika," for example, Ruga describes pre-election PR for the Medved faction in the 1999 State Duma elections as his most successful campaign. Medved, of course, was the precursor of today's pro-Kremlin United Russia bloc. More intriguingly, "Kommersant-Daily" reported on 30 August that the Moscow rumor mill at one time attributed to Ruga then-Prime Minister Vladimir Putin's infamous 1999 remark about rubbing terrorists out even as they sit in the outhouse.

Russian piar enjoys a mystic aura in part because it works its magic at the place where things are at once most and least visible -- at the intersection of big money and big politics, where everyone can see the results and only a chosen few can observe the inner workings. Ruga's background is classic of the genre, a potent brew of corporations and campaigns. In his new position as public relations architect for a multibillion-dollar Russian-Western oil venture, he should have every opportunity to add some heady new ingredients to the cocktail.

When Crown Prince Abdallah Bin Abd-al-Aziz al-Sa'ud arrived in Moscow on 1 September, the press found ample reason to play up the three-day visit to Russia by the de facto ruler of Saudi Arabia. The last such high-level meeting took place back in 1932, and it was followed by decades of strained ties. (In fact, diplomatic relations between the two countries ceased altogether between 1938 and 1990.) More practical-minded observers noted that Saudi Arabia and Russia are today the world's top two exporters of crude oil.

That said, a mutual dependence on oil revenues is hardly the basis for a lasting partnership. Saudi Arabia is a key member in the Organization of Petroleum Exporting Countries (OPEC), which has a penchant for price control through quota. Russia is not a member, and the country's mainly privatized oil companies have happily produced as much oil for export as they can to profit from high prices. Moreover, Russian-Saudi relations have hardly benefited from ongoing separatist violence in Muslim Chechnya, where Russian security forces suspect that Chechen rebels continue to receive financial support from well-heeled Saudi sympathizers. Leading Russian business daily "Vedomosti" summed up these concerns in a 3 September editorial, commenting, "It is difficult to find a greater conundrum for a diplomat than a rapprochement between Riyadh and Moscow."

Not everyone agreed. As the crown prince met with top Russian officials in Moscow, prominent optimists from both countries engaged in strikingly similar "what if" speculation. Russia's other leading business newspaper, "Kommersant-Daily," ran a 2 September analysis by Aleksandr Reutov. Noting that many Saudi businessmen began pulling their money out of the U.S. economy after the "anti-Saudi campaign that broke out in the United States after 11 September [2001]," Reutov began to muse about "$200 billion looking for a new use." Warming to his theme, he continued: "The $200 billion that Riyadh could invest, if things work out, in Russia's military-industrial complex would allow Moscow to make a tremendous leap forward. The combination of Saudi financial capabilities and Russian high-tech designs could add to the political map of the planet an entirely new center of power perhaps capable of returning the world to a bipolar system."

Though cooler heads might be tempted to dismiss the preceding as fantasy, it is apparently a fantasy shared by more than one. An op-ed by Al-Sirr Sayyid Ahmad on 4 September in the Saudi-owned, London-based Arabic daily "Al-Sharq al-Awsat" also touted an investment-fueled Saudi-Russian push for bipolarity. After informing readers that "the volume of trade between Russia and the Arab world was $5.5 billion last year, although it reached $55 billion in the years before the collapse of the Soviet Union," Ahmad boldly stated: "Russia can provide investment opportunities for the private Saudi funds that are still wandering the world's capitals in search of investment opportunities. Russia is tempting because of the unwelcoming, or even hostile, atmosphere for Saudi money in Western capitals.... Broadening the base of economic cooperation can give added impetus to cooperation in the political sphere in order to confront Washington's dubious intent to exploit its status as sole superpower to redraw the map of the Middle East."

Judging by the results of the crown prince's visit, however, the march to a bipolar world is off to a slow start. Amid much talk of goodwill and common cause, the showcase event came in the form of a vaguely worded intergovernmental agreement pledging to stabilize world oil markets through -- you guessed it -- increased cooperation. A few deals also emerged on the margins. Russian pipeline builder Stroitransgaz signed a strategic-partnership agreement with Saudi construction firm Oger Ltd., Prime-TASS reported on 3 September. Two heavyweight holding companies -- Russia's AFK Sistema and Saudi Arabia's Jeraisy Group -- signed an agreement on 3 September to produce Russian helicopters in Saudi Arabia, reported the next day. And a Smolensk diamond broker is apparently gearing up to sell gems in Saudi Arabia, "Vremya novostei" reported on 4 September.

The question lurking in the wings is whether Russia's foreign policy, with its inchoate longing for a multipolar world and its tendency toward ill-considered opportunism, can help to draw investment to non-raw-materials sectors of the economy that badly need it. The above-quoted musings from "Kommersant-Daily" and "Al-Sharq al-Awsat" indicate a shared readiness, on the rhetorical level at least, to entertain grand dreams of business serving a broader geopolitical agenda. The modest results of the crown prince's visit show that much more will be required to translate rhetoric into reality.