Business Watch: January 8, 2002

While visiting Baku, LUKoil chief Vagit Alekperov told reporters that his firm will consider acquiring a 7.5 percent stake in the Baku-Tbilisi-Ceyhan (BTC) pipeline project. He said any bid to participate in the project would have to be approved by LUKoil shareholders and predicted a decision could be made in early January, Reuters reported. The Russian government owns a stake in LUKoil. Russian officials have called the Baku-Ceyhan project financially unfeasible. Analysts and U.S. officials have noted flickers of Russian interest in the pipeline, however, and improving U.S.-Russian relations might foster Russian participation. The pipeline, running 1,000 miles (1,600 kilometers) with BP Amoco as the largest private investor, is one of several planned for the region. Construction of the $2.75 billion pipeline is to start in summer 2002. (JMR)

The cut agreed by the Organization of Petroleum Exporting Countries (OPEC), of 1.5 million-barrel per day (bpd), went into effect on 1 January. OPEC, which pumps about 40 percent of the world's oil through primarily state-run industries, has complained that whenever it curtails output to boost the price of crude, Russia steps in and increases its market share. James Fenkner, a strategist for the Moscow-based Troika Dialog investment bank, told AP, "OPEC is pitted against a really revived Russia, which has some of the most efficient oil companies in the world. On the other side are really quite fat and inefficient OPEC states." Russia agreed to a 150,000 bpd cut; significantly less than OPEC had hoped. Hugo Erikssen, spokesman for Yukos, said that the oil giant "will, like any other Russian oil company, abide by the Russian government." He added, "And we intend to increase oil production by a double-digit figure next year." Christopher Weafer, chief researcher for Troika Dialog, predicted in a recent study that by the end of the decade, Russia could be "by far, the dominant global energy supplier," destroying "OPEC's ability to control pricing in isolation." The government wields little control over the privatized oil industry and is heavily dependent on oil revenues to stay afloat. The Kremlin does have some leverage because it controls the pipeline system through which the oil flows. Additionally, the Russian government imposes export quotas on oil products, something it has hinted it might increase if the oil companies agree to carry out the necessary production cuts. (JMR)

Russian exports of oil fell 60,000 barrels per day (bpd) in December against the November figure of 2.81 million bpd, according to industry sources close to the Energy Ministry. Crude exports in the fourth quarter fell by 150,000 bpd to 2.96 million bpd versus the previous three-month period. The country had planned to ship abroad 3.10 million bpd of crude in the fourth quarter, but saw a shortfall of 140,000 bpd as its main export ports were hit by heavy storms in November and December. Russia promised in November to cut its crude exports by 50,000 bpd starting on 1 December and by 150,000 bpd from 1 January in order to help OPEC support flagging oil prices. Crude exports for the full year 2001 rose by 140,000 bpd to 3.0 million bpd. Total Russian oil production also increased in 2001, by 500,000 bpd to 6.99 million bpd. Russia exported 2.68 million bpd of its own crude in 2001 and 329,000 bpd of transit crude, of which Kazakhstan shipped 270,000 bpd and Azerbaijan 45,000 bpd, Reuters reported. The state pipeline monopoly Transneft shipped abroad 2.92 million bpd in 2001 while 95,000 bpd was exported by small ports and the railway not controlled by Transneft. (JMR)

Ukrainian President Leonid Kuchma expressed concern over the government's forecast for 6 percent economic growth for 2002. He worries that the global economic slowdown will hit exporters, the backbone of his country's recovery. "We cannot deceive our people every year. We have to have honest figures," Kuchma was quoted as saying by local media. The International Monetary Fund (IMF) said it expected growth to fall short of the 6 percent target, but gave no precise forecast. Gross domestic product (GDP) is expected to rise by up to 8 percent in 2001. Exports account for some 60 percent of GDP. Reuters noted that Kuchma expressed these concerns one day after the U.S. announced it would impose sanctions on $75 million of Ukrainian exports in retaliation for the continued piracy of U.S. music compact discs and other media products. (JMR)

Russian Communications Minister Leonid Reiman has predicted that telephone and information technology firms' sales grew 60 percent in 2001, after a rough calculation. Reiman said he based his growth estimate on sales increases of about 40 percent for the first nine months of the year across the sectors he governs, which include telecommunications, information technology, and mail. Sales at state-controlled local telephone monopolies, which the government is consolidating and plans to float on Western markets, grew about 46 percent, while information technology firms sales rose about 38 percent, Reuters reported. Reiman said Russian mobile operators had more than doubled their subscriber base to over 6 million, or 4 percent of the population, and analysts expect the trend to continue. He said stiff competition among mobile operators had led to a 30 percent decrease in cellular tariffs across the country. Reiman is expected to license a third GSM-standard cellular operator to work in St. Petersburg. He hinted in September that Moscow-based Vimpelcom, Russia's second-largest mobile firm, had "good chances" of winning the license. (JMR)

Russian metals giant Norilsk Nickel has announced that it is not planning any exports in January and may hold back exports in February as well. The company exported 177,400 tons of nickel in 2001 together with 422,000 tons of cooper, Reuters reported. According to a company statement, "Our earlier planned volume for exports of nickel in 2001 was 155,000 tons. Our exceeding the planned volumes is linked with the fact that in January 2002 Norilsk Nickel will not export any nickel. Moreover, nickel might not be exported in February, 2002." Russian Deputy Finance Minister Valerii Rudakov said the government would sign resolutions in the next few days granting 2002 export quotas to platinum group metals producers and lifting a 5 percent gold-export tariff. Norilsk Nickel, which has a 10-year quota for palladium exports, will receive a five-year quota for platinum exports and an annual quota for exports of another platinum group metal, rhodium. Norilsk is the country's sole producer of primary palladium. (JMR)

Russian President Vladimir Putin ended the year by signing into law the 2002 budget and a new labor code. The Russian State Duma passed the budget on 14 December and the Federation Council on 26 December. The 2002 budget surplus, Russia's first, is expected at 1.63 percent of gross domestic product if oil prices meet government targets. The price for Russia's key export, Urals blend crude, is forecast at $18.5 per barrel and gross domestic product growth is seen at 4.3 percent, Reuters reported. The new labor code allows private firms to hire and fire workers. It also seeks to boost job security, locking in workers' rights, and penalizing employers for delays in paying wages. The new code formally provides for a 40-hour working week, enshrines the right to paid leave after six months' employment instead of 11 months, and sets 28 days as the minimum holiday entitlement. It also sets the minimum wage at $10 a month. (JMR)

The European Bank for Reconstruction and Development (EBRD) has said that Latvia should continue large-scale privatization, as foreign-investment inflow is crucial for the country with its high fiscal and current-account deficits. In a report describing its strategy for Latvia, the EBRD said the country had made progress in its transition to a market economy. It noted however that, "External vulnerability [with a current account deficit of around 7 percent of GDP] remains a concern, particularly in the context of high fiscal deficits and increased perceptions of general emerging market risk by foreign investors." The Latvian Central Bank recently raised its forecast for the 2001 current account deficit to slightly over 8 percent of GDP versus earlier expectations of 6.5 percent as a large expenditure by a state-run shipping firm tipped the trade balance. Economic growth is expected to slow to between 4.5 percent and 5.0 percent in 2002 from the forecasted expansion of over 7 percent in 2001, Reuters reported. Latvia's high budget deficit has been criticized by international institutions and the central bank. Latvia approved the 2002 budget with a fiscal deficit of 2.46 percent of GDP, effectively suspending its 18-month $42 million stand-by agreement with the International Monetary Fund (IMF). The EBRD specifically urged Latvia to privatize Latvian Shipping and sell state-owned stakes in oil terminal Ventspils Nafta, Savings Bank, and fixed-line operator Lattelekom. (JMR)

During a visit to Washington, D.C., Kazakh President Nursultan Nazarbaev and U.S. President George W. Bush agreed to strengthen the long-term strategic partnership aimed at bringing Kazakhstan increasingly into the global economy. Both leaders underlined their interest in multiple east-west oil export routes. Foreign Minister Erlan Idrisov and Secretary of State Colin Powell also signed an energy partnership declaration that the U.S. State Department said "reaffirms U.S. support for multiple export routes of oil, particularly along the proposed Baku-Tbilisi-Ceyhan pipeline." The State Department added, "It also strengthens cooperation on energy security and enhanced protection of production and transport facilities and promotes further cooperation on electrical power, nuclear energy and environmental protection." Idrisov said Kazakhstan continued to support both the Caspian Pipeline Consortium's pipeline to the Black Sea, opened this month, and the Baku-Tbilisi-Ceyhan route. But he added, "Iran is not excluded completely," Reuters reported. Bush pledged to work to lift sanctions against Kazakhstan which stem from the 1974 Jackson-Vanik amendment that linked trade ties to Soviet-era restrictions on Jewish emigration, while Nazarbaev vowed to continue economic reforms. Nazarbaev would like his country to play as prominent a role as possible in the reconstruction of Afghanistan and in humanitarian efforts aimed at feeding its people. Idrisov said Kazakhstan was also willing to contribute peacekeepers to an international force for Afghanistan. (JMR)

Ukrainian President Leonid Kuchma has appointed Igor Yushko as new the nation's new finance minister. Prior to his appointment, Yushko served as a parliamentary deputy and used to head one of the country's largest commercial banks, First Ukrainian International Bank. Prime Minister Anatoliy Kinakh said Yushko, the second-ranking finance ministry official, was appointed after proving his professional skills as a deputy head of the parliamentary committee on banks and financial activities, Reuters reported. He replaces Igor Mityukov, who has been in charge of the Finance Ministry since 1997. Kinakh told reporters that Mityukov was removed for his failure to implement the 2001 budget. President Kuchma also frequently chided Mityukov for slow tax reform. In 2001, the government found it difficult to meet its budget targets, mainly due to lower-than-planned revenues from privatization. The government has so far raised 2.1 billion gryvnias ($404 million) from sell-offs, compared with the annual plan of 5.9 billion gryvnias. (JMR)

Uzbekistan's central bank said in a statement that it will raise its key refinancing rate from 2 percent to 2.5 percent effective 1 January. "This measure is being taken...to further tighten the credit and monetary policy and in line with the agreement with the International Monetary Fund (IMF) on guidelines of the government's economic policy in 2002," officials announced. In March, the IMF cut its presence to a minimum in Tashkent due to the government's failure to speed up reforms and liberalize the foreign-exchange market.

Meanwhile, on 20 December, Uzbek President Islam Karimov agreed to sign an accord with the IMF by 1 July to ensure the convertibility of the national sum currency on current-account operations. He gave no details. The ability to change currency freely is one of the key goals of the IMF. It has criticized Uzbekistan for having restrictions on currency conversion and for having multiple exchange rates. (JMR)

The Estonian Statistics Office reported that industrial sales in November were higher than expected at home and abroad, rising 8.9 percent year-on-year and 6.9 percent in the first 11 months of the year. The rise was boosted by greater demand for textile, wood, and rubber products. A Reuters survey of seven analysts showed that November industrial sales were expected to rise an annual 6.1 percent. Industrial sales rose an annual 10.3 percent in October and 2.1 percent in September. In November of 2000, the annual growth was 7.9 percent, reflecting the recovery of the country's industry after recession the previous year. Among major sectors, output of textiles rose an annual 38.9 percent in November, while output of rubber and plastic products rose 25.1 percent and wood processing a year-on-year 21.6 percent. Sales of machinery and equipment posted the highest annual increase over the January to November period, up 38.6 percent year-on-year. (JMR)

Lithuania paid over 130 million litas to foreign lenders, easing its foreign debt by 2.2 percent in November. The country's total foreign debt stands at 9.994 billion litas ($2.499 billion), Reuters reported. The Lithuanian Finance Ministry said the country's total state debt, including foreign and domestic direct as well as indirect debt, dropped 69.7 million litas over the month to 13.108 billion litas. The country's total state debt was 27.3 percent of this year's planned GDP of 48.01 billion litas. At the end of November, direct state liabilities totaled 10.941 billion litas, or 83.5 percent of the total state debt. Contingent liabilities, such as state guarantees extended to a third party, totaled 2.167 billion litas, or 16.5 percent of total state debt. At the end of November Lithuania's total long-term debt was 12.3 billion litas, or 93.8 percent of the total debt. (JMR)

Kyrgyz Finance Minister Temirbek AkmatAliyev announced that the nation paid off $41 million of its obligations in 2001. The government is seeking to restructure more of its external debt. "As of today, we have paid off $41 million, and I must say that any sum bigger than $40 million has been record-breaking [for Kyrgyzstan] in the last decade," he told "Obshchestvenny Reiting (Public Rating)." Kyrgyzstan originally planned to spend $105 million to service its debts in 2001. But $58 million of that sum was restructured in November as the country clinched a deal with the Paris Club of sovereign creditors. A $93 million loan from the International Monetary Fund (IMF) in December gave the nation more breathing room. AkmatAliyev noted that Kyrgyzstan's external debts stood at $1.43 billion as of 1 October. He added that amid low interest from direct investors, the country needs long-term loans and will seek to restructure its current obligations. "If we manage to receive loans for as long as 40 years and make use of all the restructuring mechanisms existing in international practice, then our policy will turn out to be correct," he said. Reuters reported that Kyrgyzstan's foreign debt is 125 percent of GDP.

Following talks in Kyrgyzstan, the IMF urged that country to continue reforms. "Directors commended the authorities' recent macroeconomic policy performance, which has resulted in strong growth, low inflation, and stability in the foreign-exchange market." The Fund called for a new economic program to be introduced to enhance growth and reduce poverty. The Fund said it expected GDP growth to come in at 4.5 percent in the next three years compared with a 5.0 percent rise in 2000, the same as is expected in 2001. It called on Kyrgyzstan to be cautious about further borrowing abroad. (JMR)

Despite a global economic downturn, Russian citizens are spending more of their cash this holiday season. High prices in 2000 and early 2001 on oil and other key exports have fueled economic growth, filled government coffers, and created better jobs that are helping form a class of deep-pocketed consumers, Reuters points out.

The spending spree is most evident in the capital, Moscow, by far Russia's wealthiest city, which accounts for 30 percent of the country's spending and where the average annual income of nearly $6,000 is many times the national average. The manager of the Ramstore hypermarket chain, owned by Turkish conglomerate Koc Holding, said, "We've got extra cashiers working all shifts. The number of customers coming through the door has been tremendous.... If anything, sales have only picked up and continue to do so as the holidays get closer." After expanding at a post-Soviet record of 8.3 percent in 2000, Russia's gross domestic product in 2001 is expected to have grown more than 5.5 percent. Stronger growth translated into a 9.1 percent rise in the average income in 2000, with a similar increase predicted for 2001. Russian President Vladimir Putin has promised increased spending on wages for the military and government workers in the new year and confirmed his agenda for sustained economic expansion.

Many Russians, who spend up to 80 percent of their income on consumer goods compared with 30 percent to 40 percent in the West, are also experiencing the joys of buying on credit for the first time. Options are available to pay on credit for everything from apartments to kitchen appliances and vacation trips. "Demand for credit has surged over the last few weeks. People are using the New Year's holiday as an excuse to buy something nice for themselves or their families," said a manager of an electronics shops near the Kremlin. "For most people buying on credit with us, this is the first time they have ever bought on credit. I think it is a sign of confidence in Russia and their own situations." (JMR)