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Business Watch: January 15, 2002


15 January 2002, Volume 2, Number 2
OIL & GAS
POLAND CUTS DEMAND FOR RUSSIAN GAS (7 January)
Ahead of talks with Russian gas giant Gazprom focusing on gas deliveries, Poland announced cuts in its medium- and long-term natural gas demand forecasts from 15.7-17.9 billion cubic meters (bcm) in 2005 to 13.7-16.2 bcm. The revision, by Poland's new leftist government, comes in the run-up to an attempt to renegotiate terms of the country's 1996 long-term gas supplies contract with Russia. Polish authorities hope a deal can be reached before the arrival of Russian President Vladimir Putin in mid-January. Under the deal, Poland will start receiving 12.5 bcm of gas a year after 2010 on a take-or-pay basis, which forces the purchaser to buy contracted gas even if it cannot consume it. Deputy Economy Minister Marek Kossowski told Reuters, "The new demand forecasts take into account lower economic growth forecasts, and they will be the basis for talks with any future suppliers, including Gazprom." He said this week that gas volumes, timing of deliveries, and Russia's investment in the Polish-based pipelines will be discussed with Gazprom in Moscow. Kossowski said that, according to numbers prepared by the National Energy Agency and state-owned gas monopoly PGNiG, Poland's demand would stand at 14.9-19.8 bcm in 2010, rather than the 18.4-22 bcm forecast by the previous government. Together with Polish PGNiG, Gazprom operates the first stretch of the Yamal-Europe transit pipeline pumping Russian gas across Poland to Germany. Poland's uncertainty over future gas needs and Gazprom's own alternative plans of transit routes have so far derailed completion of the Yamal project. Poland currently consumes around 11 bcm a year, with more than 60 percent of its demand imported, primarily from Russia. (JMR)

ITERA TO OPERATE UKRAINE-TURKMEN CONTRACTS (7 January)
Controversial Florida-based Itera Group will act as an operator of Turkmenistan gas deliveries to Ukraine in 2002. Corresponding agreements and contracts have been signed with NAK Neftegaz Ukrainy, Gazprom, and gas-transport companies from Kazakhstan and Uzbekistan. According to a company statement, Itera will provide for the transportation of 34 billion cubic meters (bcm) from Turkmenistan to Ukraine. Over the past three years the total volume of Turkmen gas transported to Ukraine by Itera has reached almost 47 bcm. Since the completion of its first gas project in 1994, Itera has provided for the delivery of more than 150 bcm of natural gas into Ukrainian gas pipelines.

In 2002, Itera plans to purchase up to 10 bcm of gas from Turkmenistan. These volumes will be delivered to several members of the Commonwealth of Independent States. Itera delivered about 80 bcm of natural gas to regional consumers in 2001. The company also plans to increase its recovery of gas from the Yamalo-Nenets Autonomous Okrug of Russia. Itera is planning to tap about 30 bcm of natural gas this year, and by 2007 to 2010 bring its own gas production volume up to 80 billion cubic meters. (JMR)

BUSINESS ALERT
DAIRY AND FRUIT JUICE MAKER'S IPO SET FOR JANUARY (31 December)
Wimm Bill Dann, Russia's leading dairy product and fruit juice company, is set to issue an initial public offering (IPO) on the New York Stock Exchange (NYSE) in January. The company plans to offer 25-30 percent of its share capital via a listing of American Depositary Receipts (ADRs). Wimm Bill Dann had sales of $480 million in 2000. The company is believed to control 30-40 percent of the Russian domestic market in dairy products and juices. Wimm Bill Dann's launch follows earlier successful IPOs by MTS and Vimpelcom. IBS, a computer services company, and LUKoil indicated plans to issue IPOs in 2001 but have since postponed their issues, citing poor market conditions, the "Financial Times" reported. Russia's economy in 2002 is predicted to grow 5 percent or more. (JMR)

JAPAN TO FINANCIAL MODERNIZATION OF RUSSIAN SATELLITES (3 January)
The Russian federal company Space Communication, the Russian Central Bank, and Japanese financial group Sumitomo signed an agreement on financing for an $800 million project aimed at reviving Russian telecommunications satellites, "RFE\RL Newsline" reported. The project calls for Russia to launch seven advanced digital telecoms satellites between 2002 and 2005 which, with the help of Japan's NEC, will replace the aging Russian orbital fleet and provide Russian television viewers with over 100 new channels. Communications Minister Leonid Reiman said that, with Tokyo's assistance, Moscow will not only considerably improve the technical elements of television broadcasting but also emerge on the global market for telephone and cellular services. (JMR)

KAZAKHMYS RAISES ITS 2001 OUTPUT (7 January)
Kazakh copper monopoly Kazakhmys raised its 2001 output to 418,400 tons from 394,700 tons in 2000 despite a general downturn in world prices for the metal, Reuters reported. Kazakhmys, which accounts for over 90 percent of Kazakh refined copper production, plans to increase its output further to 420,000 tons this year. Company spokesman Vladislav Nikolaev said the corporation's sales stood at around $770 million in 2001, unchanged from the previous year. "Last year's world copper price averaged $1,578 [per ton], while in 2000 it was around $1,817," Nikolaev said. "We hope there will be a rise [in prices] this year. How strong? It is hard to say. Prices remain low at the moment," he said.

Last year, Kazakhmys raised gold output to 5.581 tons from 4.074 tons in 2000, and silver output to 654 tons from 548 tons over the same period. Nikolaev said zinc-concentrate output fell to 67,800 tons from 89,900 tons last year. Kazakhmys is 32.4 percent owned by South Korean industrial conglomerate Samsung, while the state holds a 25 percent stake. (JMR)

RUSSIAN BUSINESS ABROAD
RUSSIA SECURES DESTROYER CONTRACT WITH CHINA (5 January)
Russia has reached an agreement to deliver two new destroyers to China. The defense contract is worth $1 billion. Russian engineers will build the two destroyers in St. Petersburg. The contract follows the agreement of a new treaty between Russia and China that increases defense ties and notes that Russia accepts China's sovereignty over Taiwan, the Australian Broadcasting Corporation reported. The Russian State Duma has also passed the Russia-China Friendship Treaty. (JMR)

WTO CONFIRMS RUSSIA'S READINESS TO JOIN (8 January)
World Trade Organization (WTO) chief Mike Moore said that Russia could be prepared to join the trade group within a year. In a speech to a business conference in Oslo, Moore said, "Russia is within our reach as a new member within a year. We have a core group of ministers who have the willpower, the horsepower, and the firepower to make this happen." Reuters noted that Russia is the largest economy that is not a member of the 144-nation trade regulatory body. Russia is working on draft legislation to bring its laws in line with WTO rules. The resulting draft laws are expected to be submitted to parliament early this year. Russia has said that WTO membership is a high priority for the Putin administration. Tough WTO negotiations are expected over high Russian agricultural subsidies in particular, officials have said. (JMR)

ECONOMIC NEWS & BUSINESS STATISTICS
ARMENIA ADOPTS 2002 BUDGET (28 December)
The Armenian parliament, in a vote of 85 to 21 against with four abstentions, adopted a 2002 budget on 28 December. Four days earlier, the government had raised both planned revenues and expenditures by 3.1 billion drams ($5.5 million) to 217 and 260 billion drams, respectively. That is far less than foreseen in amendments proposed during the weeklong debate on the draft bill, which would have raised spending by 24 billion drams. The planned revenue target is 13 percent higher than in 2001, which Deputy Finance and Economy Minister Pavel Safarian admitted on 24 December is "ambitious." If fulfilled, it will reduce the fiscal deficit by more than 20 percent, to 3.2 percent of planned gross domestic product (GDP). External borrowing accounts for a lower proportion of revenues than in 2001. GDP growth is anticipated at 6 percent. ("RFE/RL Newsline," 3 January)

KUCHMA APPROVES 2002 BUDGET (3 January)
Ukrainian President Leonid Kuchma has approved and signed into law a budget for 2002. The budget, the nation's first to adhere to International Monetary Fund (IMF) accounting standards, is a key condition for Ukraine to unlock badly needed loans from the Fund. The budget envisages a modest budget deficit of 1.7 percent of gross domestic product. It follows a tight fiscal policy, which will allow Ukraine to receive the next $375 million installment from the IMF under its $2.6 billion loan program. The draft budget had been rejected several times as parliamentary deputies, facing elections in March, and voters, battling dwindling incomes and widespread poverty, clamored for higher spending and handouts for police, soldiers, and teachers, Reuters reported. The revenue target was set at 45.2 billion gryvnias and spending at 49.5 billion while the deficit is fixed at 4.3 billion. (JMR)

RUSSIA TO ISSUE $2 BILLION IN BONDS FOR DEBT (8 January)
In a government announcement signed by Russian Prime Minister Mikhail Kasyanov, Russia said it would issue up to $2 billion in Eurobonds to swap for commercial loans as part of its efforts to restructure huge foreign debts inherited from the Soviet Union, Reuters reported. The loans are credits received by Soviet firms from foreign companies without Soviet state guarantees. The total claims at the outset were some $6 billion, but negotiations have so far reduced this to around $2 billion. According to the statement, "The Finance Ministry of the Russian Federation is to carry out in the name of the Russian Federation an issue of foreign bonds...with a total volume of no more than $2 billion with the aim of carrying out a restructuring of the verified debt." It gave no timeframe for the debt issue, but it is expected to be set for March or April. The document said the principle and interest of the debt would be restructured into 2030 Eurobonds with a discount of 37.5 percent. Overdue interest will be restructured into 2010 Eurobonds with a 9.5 percent discount. The Soviet-era commercial debt is part of Russia's total foreign debt of $156 billion, of which the Central Bank says about $65 billion is former Soviet debt. This includes $33 billion owed to the London Club of private lenders, which was restructured for a second time after a 1998 economic crisis with a 36.5 percent discount. The Paris Club of sovereign creditors is owed around $40 billion which was restructured in 1996. (JMR)

UPCOMING CONFERENCES
BRAZILIAN PRESIDENT TO VISIT RUSSIA (4 January)
The Kremlin press service announced that Brazilian President Fernando Henrique Cardoso will visit Russia on 13-16 January. During the visit, talks between Cardoso and Russian President Vladimir Putin will focus on arms contracts, nuclear and space deals, and political issues. They will also touch on expanding political cooperation with the UN and other international organizations. Mutual trade soared by 70 percent last year, hitting $1.5 billion, and is poised to rise further, officials told Reuters. Moscow is offering Brazil MiG and Sukhoi aircraft in a $700 million tender for 24 jets. Russian warship and aircraft producers are also keen to win new government contracts after Brazil purchased a number of helicopters and two amphibious planes in the 1990s. Russian Prime Minister Kasyanov actively touted for military equipment business when he visited Brazil in December. Moscow also wants to clinch contracts to upgrade reactors at Brazilian nuclear power plants and to re-equip hydroelectric stations built with Soviet help. Russia has promised to help put satellites in orbit in exchange for use of Brazil's equatorial Alcantara launch pad. (JMR)

POLITICAL ECONOMY
RUSSIANS PREFER PRE-REFORM LIVING STANDARDS (6 January)
According to a poll of 2,000 respondents throughout Russia conducted by ROMIR-Gallup International public opinion research group, the majority of Russians prefer the pre-reform living standards. It is estimated that 55.1 percent of those asked said they wished they could have their pre-reform living standard returned. Only 32.6 percent said they preferred their present lives. Interfax new agency reported that 12.3 percent of the respondents were undecided. Russians have had to cope with poverty and unemployment since reforms were launched in 1991 in an attempt to help the nation make the transition from a communist planned economy to a market-based system. Pensioners have been hit the worst, as many have been deprived of communist-era social benefits, forcing them to make ends meet on meager pensions, UPI reported. (JMR)

RUSSIA -- BELIEVE IT OR NOT
STOLEN BELGIAN CARS TURN UP IN RUSSIA (7 January)
Police in Mechelen, north of Brussels, told Reuters they had received a fax from Interpol Moscow in late December saying that several cars reported stolen in Belgium 10 years ago have resurfaced in Russia. Two Soviet-era Ladas and a Mercedes stolen in Mechelen were being held in a Moscow depot. The owners were immediately informed but reacted unenthusiastically as their losses had been compensated by insurance long ago. (JMR)

SOVIET INTOURIST HOTEL TO BE DEMOLISHED (8 January)
The Intourist Hotel, a Soviet�era monument that, according to "The Times," "symbolized decades of sleaze, sloppiness and surly suspicion," closed on 7 January. The 22-story glass, aluminum, and concrete hotel was proposed by Soviet President Nikita Khrushchev, who was determined to have a skyscraper like those he saw in America. Rooms were small and spartan, the food cold, bands raucous, and service appalling. The rooms were reputedly bugged and the bar full of informers. Cockroaches were common in bathrooms, and rats in the cellars. Showers and chandeliers were often broken. The hotel was staffed with suspicious people. Black marketers and pimps frequented the lobby. Soviet-era pop singer Iosif Kobzon, dubbed "the Frank Sinatra of Russia" by some and a "godfather" by others, had a personal office in the building. Bombings have occurred at the hotel in apparent turf wars. The hotel is located on Tverskaya Street (formerly Gorky Street), two minutes' walk from Red Square, in a coveted real-estate district of Moscow.

Moscow First Deputy Mayor Vladimir Resin told RIA-Novosti the dismantling of the hotel will begin in March 2002. It will be taken apart floor by floor because it is located too close to the National Hotel to allow for an explosive demolition. In its place, a new Hilton hotel with 12 floors and 400 rooms is to be constructed by the end of 2004. The overall project, including the dismantling of the old building and the construction of a lower but larger one, is budgeted at no less than $130 million, according to the news agency. (JMR)

WHO IS IN? WHO IS OUT?
NEW APPOINTMENTS (30 December)
Russian President Vladimir Putin signed a decree appointing Andrei Denisov as deputy foreign minister in charge of international economic cooperation. Prior to this appointment, Denisov served as Russia's ambassador to Egypt. The previous day, Putin made Anatolii Pristavkin, who was most recently the head of the Presidential Pardons Commission, one of his advisers. ("RFE\RL Russian Political Weekly," 7 January)

MIKHAIL FRIDMAN NAMED OLIGARCH OF THE YEAR (3 January)
"Vedomosti" has named Mikhail Fridman, head of Alfa Group, as the oligarch of 2001. The newspaper notes that he is the only Russian businessman who can compare to their choices as the top entrepreneur in previous years. It notes that Fridman is equal to former Sibneft head Roman Abramovich and Russian Aluminum head Oleg Deripaska in terms of "aggressiveness," and Fridman "has achieved almost everything." Alfa Bank, which is one of the subsidiaries of Alfa Group, is one of Russia's largest banks, both in terms of assets and attracting deposits. The Tyumen Oil Company, controlled by the Alfa Group, has ended its war with Interros head Vladimir Potanin for Sidanko and has partnered itself with British Petroleum. In addition, the Alfa Group has enlarged its presence in the telecommunications and insurance sectors by obtaining shares in VympelKom, Golden Telecom, and forming the Alfa Insurance company. ("RFE\RL Newsline," 3 January)

WHAT'S UP? WHAT'S DOWN?
UKRAINE'S INFLATION HITS 10-YEAR LOW (3 January)
Sergei Samoilenko, an aide to Ukrainian Deputy Prime Minister Vasyl Rohovy, told Reuters, "Monthly inflation in December 2001 was 1.6 percent, and annual inflation for 2001 was 6.1 percent." In 2000, Ukraine's inflation rate was a heady 25.8 percent, but falling food prices and the stabilizing gryvnia currency helped curb increases in the cost of living last year. Producer price rises have also steadied, climbing only 0.9 percent in 2001 after a 20.8 percent rise in 2000, Samoilenko said. In December, producer prices rose by 0.5 percent from November. The figures will hearten ministers engaged on a campaign to attract foreign investors, who have criticized that nation's extensive red tape, inflation, corruption, and opaque business laws. Foreign direct investment since 1991 totaled $4.19 billion as of October last year, or about $85 per capita, one of the lowest rates among former Soviet republics. Ukraine is also pressing for membership in the World Trade Organization (WTO). (JMR)

LITHUANIAN UNEMPLOYMENT RISES (4 January)
Lithuania's official unemployment rate rose in December for the third straight month, reaching 12.9 percent. The figure was up from 12.5 percent in November. Approximately, 224,040 people are jobless. The December rate comes close to a decade high of 13.2 percent in February and March of 2001, as seasonal unemployment persists. The Labor Exchange said it registered 10,886 jobs on offer last month against 13,545 in November, some 78 percent of them being full-time, Reuters reported. Labor experts predict that the unemployment rate will shrink to 11.3 percent in 2002. (JMR)

KYRGYZ INFLATION DROPS TO 4 PERCENT (4 January)
Central Bank Chairman Ulan Sarbanov announced that Kyrgyzstan's consumer price inflation dropped to 4.0 percent last year from 9.6 percent in 2000, Reuters reported. He noted that the government had originally set a target of inflation for 7 percent in 2001. Last year's inflation is the lowest since independence in 1991, he said. Consumer prices are expected to grow 6-8 percent this year. (JMR)

RUSSIAN INFLATION FELL SLIGHTLY IN 2001 (8 January)
The Russian State Statistics Committee released inflation figures which showed annual inflation fell slightly from 2000 figures to 18.6 percent. The year-end figure included a month-to-month rise of 1.6 percent. This compared with a monthly rise in prices for November of 1.4 percent. Inflation has been above government targets for most of the year. Analysts said prices were fueled by the printing of money by the Central Bank to buy dollars from Russian oil exporters for the country's foreign currency reserves. This will continue to be a factor in 2002, along with planned rises in gas and power prices. Peter Boone, chief economist at Brunswick UBS Warburg, predicted that inflation for 2002 would be posted at 13 percent, although this would depend on a forecast for oil prices of $18 per barrel being met. Alfa-Bank said in a recent research note that its forecast for 2002 was 16 percent inflation. (JMR)

PROFILE
FADY ASLY: DOING BUSINESS IN GEORGIA UNDER ATTACK
Fady Asly is no newcomer to doing business in a difficult environment. Asly is a native of Beirut, Lebanon and has seen first-hand civil wars, terrorism, crime and corruption. His previous experiences working for Geneva-based NA Plus holding company in Beirut, the Middle East, Africa, and the Caucasus would account for an important part of his decision to accept a management position in the former Soviet Republic of Georgia. Asly moved to Georgia in May 1998 to assume responsibilities for the Caucasus and Central Asia. NA Plus's subsidiary, Agritechnikics, began importing foodstuffs into Georgia and soon became the largest importer in Georgia. Today, Agritechnikics imports roughly 10,000 tons of food into Georgia and another 18,000 tons of foodstuffs through Georgia to Azerbaijan and Armenia, representing roughly $1 million per thousand tons.

Georgia has struggled with civil unrest and the daunting task of establishing government from the ashes of the Soviet system and the failed first independent government of President Zviad Gamsakhurdia. As with the other newly independent states, the rule of law has been slow to take root, and, with a small economy and low public wages, corruption is a constant feature of the over-regulated environment. Asly's ability to adapt as the manager in Georgia for a large food distribution network beyond its borders in the Caucasus and Central Asia is no small feat.

But Fady, as his friends call him, is a man of personal and physical strength. Agritechnikics parent NA Plus has American and European shareholders and operates in 14 countries from Turkey to the Middle East, Eastern Europe, and the Caucasus and Central Asia. Asly is in charge of NA Plus's business in the Caucasus and Central Asia.

Asly immediately imposes himself on those he meets with his physical presence. Over 6 foot 3 inches tall, his wide and warm smile immediately draws people to him. He is well-groomed and well-dressed, with impeccable manners. His wit and charm immediately relax those he meets, to whom it becomes clear that Asly is a man of strength and character. A former U.S. ambassador to Georgia described Asly as "courageous" for his fortitude in standing up to corruption. The ambassador knew him well and worked closely with Asly when the latter was president of the American-Georgian Chamber of Commerce in Tbilisi, Georgia. In this capacity, he organized a coalition of Caucasus businesses to establish a cooperative alliance between the American Chamber of Commerce (AmCham) of Georgia, Azerbaijan, and Armenia. The alliance of AmChams in the region primarily works on customs and tax harmonization. Asly as president of AmCham took on issues of customs and tax reforms while working closely with the U.S. Embassy. Since leaving his position as president of AmCham, Asly has worked to establish the Georgian Business Confederation. This group represents the top companies in Georgia. The leadership includes the Taxpayers Union, the International Chamber of Commerce, and the American Chamber of Commerce. Representing over 600 companies, the group plans to lobby for changes in legislation to make the business environment more friendly and transparent to business. Plans are underway to establishment an economic policy document for Georgia to highlight Georgia's competitive advantage in the region. A group has been formed to formulate this document that includes the Georgian Business Council, USAID, the economic minister, and an adviser to President Eduard Shevardnadze, as well as World Bank and International Monetary Fund involvement.

In spite of all his personal qualities, he continues to face challenges. When Asly came to Georgia to establish his import business, he immediately experienced aggressive tax inspection and customs scrutiny. This was not unexpected, because the practice of undervaluation of goods is common. Today the situation is more stable, since Georgia invited British Inter Tech Services Company to conduct valuation of imports for the Georgian government. The problem for companies like Asly's are smugglers, who can avoid the 32 percent VAT taxes on imported foodstuffs. With margins of only 3-4 percent after taxes, smugglers can kill a legitimate business quickly if unchecked. The government is also a big loser in terms of lost revenue, while some officials can profit. Recently, threats to Asly and his company have become more pronounced. Two years ago, a guard protecting one of Asly's employees was killed during a robbery in an automobile transporting a large amount of cash in dollars. The guard was an off-duty member of the Georgian Interior Ministry with a young family. That crime is still unsolved.

Then on 7 June 2001, the most troubling development occurred as Asly's Lebanese partner, Charbel Aoun, was kidnapped. As Aoun was driving to his office at the Agritechnikics warehouse, gunmen dragged him from his Niva car. (The incident occurred near the site of the previous armed robbery.) Failing to make any progress in securing his partner's release, Asly in July initiated a billboard campaign throughout the capital, Tbilisi ,featuring the image of Mr. Aoun with the date of his kidnapping. Asly steadfastly refused to pay the $500,000 ransom. The purpose of the advertising campaign on billboards and television spots was to pressure the government to solve the crime. It worked. On 23 August, Georgia's Interior Ministry conducted a special operation to free Aoun, who had been in captivity for nearly three months. The terrorists escaped, which led many to believe that the police were involved. Independent television station Rustavi-2 reported that someone high up in law enforcement was behind the kidnapping. No charges have been brought. "The New York Times" reported that the Asly advertising campaign, and the replacement of the old Tbilisi police chief accused of corruption, appear to have contributed to Aoun's release.

Today, Asly has armed bodyguards with him as he moves throughout the city. One of the most prominent foreign businessmen in the country, he has long-established a local reputation for doing all his business above board, refusing to pay bribes and take kickbacks. But his security has been increased after these incidents, including a grenade attack in the early morning hours on his office in downtown Tbilisi two months ago. No one was hurt and the perpetrator was arrested with the weapon, though later released. The man who was arrested was linked with a Georgian company, Samgori-94, which has a meat-import business that competes with Agritechnikics.

Some speculate that a competitor wanted to send another warning to Asly, as if the previous incidents were not enough. But whatever the reason, the chilling effect on investment is clear when a prominent member of the international business community and a man closely associated with the American Chamber of Commerce in Georgia is subjected to this type of pressure. One longtime observer of the Georgian scene wondered aloud if this was part of a larger effort by organized crime, working with foreign interests, to drive out foreign (read: Western) investment and influence from Georgia in order to pick the economic carcass clean. In a recent interview published by Reuters, Asly asserts that fewer and fewer foreigners are willing to take the chance in a society blighted by criminality and corruption. "The rule of law is breaking down," Asly told Reuters. "Nobody wants to send an employee here to have his life threatened. And insurance is sky-high -- of course it is hampering foreign investment." Asly said 20 percent of his company's overhead is spent on security, a figure that makes it virtually impossible to run a profitable business.

The events concerning the kidnapping of Aoun and the grenade attack on Agritechnikics' office highlight one of the most difficult challenges in the former Soviet bloc: distinguishing between criminals, businessmen, and law enforcement. If Agritechnikics were to vanish from Georgia, no significant foreign importer would remain -- leaving the relatively small market the exclusive domain of local companies. The absence of the foreign company would also eliminate one of the most significant lobbyists on the executive and legislative branches of government to reform and become more business-friendly and transparent. Hence the attacks against Asly's business interests in Georgia have a political aspect as well. His activism for economic and business reforms in Georgia threatens the old, clan-based way of doing business.

Asly, in spite of his pronouncements, appears to be heading for involvement in a new project. Sources say he is about to announce a real estate development project for foreign and high-end tenants in Tbilisi: a protected compound with its own power and heating. It is a clear indication of NA Plus's commitment to Georgia and the Caucasus. So it appears that Fady Asly will remain in Georgia, albeit surrounded by a contingent of bodyguards. (PMJ)

Next week's Profile will focus on an American investor with plans to enter the Georgian market with a regional airline.

IN FOCUS
BAT THREATENS TO CLOSE GEORGIAN OPERATIONS (11 December)
The general director of Samgori-94, Avtandil Tsereteli, warned the Georgian government that if it fails to reduce taxes on cigarettes, British American Tobacco (BAT) and Georgian Tobacco Manufacturing (GTM) will close their operations in Georgia. Samorgori-94 distributes cigarettes for BAT.

Tsereteli said that draft legislation reducing taxes on tobacco products has already been submitted to several ministries. The draft law calls for cutting taxes on one pack of cigarettes from 20 to 12 tetri. Tsereteli pointed out that BAT already pays a 20 percent value added tax (VAT) on imported tobacco and tobacco-related materials designated for local production of Viceroy brand cigarettes. According to "The Georgian Business Weekly," existing legislation prevents the manufacturer from receiving full compensation for its VAT tax; hence, domestically produced cigarettes cost more than smuggled or imported cigarettes. This prevents competition from domestically produced brands with imported or smuggled cigarettes.

Robert Wallace, general manager of BAT's Tbilisi office, said that in light of changes in the legislation and an estimated smuggled-cigarette rate of 20 percent, the Georgian Treasury could receive as much as 55 million Georgian lari ($23 million) from the sale of legal cigarettes. BAT believes that smuggled or counterfeited cigarettes occupy 60-70 percent of the Georgian cigarette market, citing Russia as a major source of illegal imports. Other sources indicate that counterfeit production of cigarettes is a significant factor in the Abkhaz economy; one source indicated that counterfeit cigarette production in Abkhazia represents approximately 50 percent of the separatist government's revenues.

Tsereteli predicted that if the Georgian government and parliament adopt new legislation reducing the tax on cigarettes, smuggling could be reduced by 50 percent, cigarette prices by 30 percent, and the budget could receive more money in the form of taxes from local cigarette producers.

In an effort to cut down on smuggling and boost domestic sales, Minister of State Avtandil Djorbenadze has formed a commission to crack down on the smuggling of oil products and cigarettes. Deputies from the Alliance for a New Georgia faction argued on 9 January that if all taxes on tobacco were paid, the resulting revenues would be adequate to double teachers' salaries, RFE/RL reported. The Georgian government approved a presidential resolution creating a special group within the Tax Revenue Ministry to maintain a more reliable record of taxes due and paid on tobacco and oil products, Caucasus Press reported.

A study published in 1999 by the Caucasian IRIS Center on the subject of cigarettes and the deficit in Georgia shows that the volume of unregistered cigarette imports significantly affected the Georgian fiscal situation. Unregistered cigarettes imported to Georgia in 1997 exceeded the volume of registered ones by five times. The wholesale prices of imported cigarettes were thus considerably undercut. In 1998, the trade deficit in this sphere was $93 million. The amount of uncollected excise tax for realized cigarettes in 1998 was at least 115 million lari ($57.5 million), representing 41 percent of Georgia's fiscal deficit in 1997. The excise tax in 1997 was 11 tetri and in 1998 was 25 tetri. In light of these figures, tax collections in 1997 could have been 62 million lari ($31 million) and in 1998 some 142 million lari ($71 million). However, in 1997 only 28 million lari ($14 million) was collected and, in a nine-month period in 1998, only 20 million lari ($10 million). IRIS has not released a more recent report monitoring the impact of cigarette smuggling on the Georgian economy. But according to the Georgian Business Consulting Group, cigarettes accounted for 5.7 percent of Georgia's 1999 imports.

Samgori-94 is one of the biggest companies in Georgia, distributing and selling items that include cigarettes and alcohol products, and meat production. It also manufactures ice cream. Samgori-94 controls a cigarette factory originally built by an Iraqi and a Jordanian investor, but which Samgori-94 occupied after these owners were forced out of the country. The circumstances of that handover are confused, with many conflicting reports. But Samgori-94 has since leased part of the plant not under the control of the Arab investors to BAT. Samgori-94 also exports alcohol to Russia. In accordance with Samgori-94's marketing studies, the volume of alcohol sales in Caucasus is estimated at about 60,000-80,000 tons per year. The company operates out of two terminals under the customs regime, one in the Port of Poti and another at the border of Russia's Kazbegi region.

BAT is one of the world's largest internationally based tobacco companies and operates in more countries than any of its competitors. BAT, with almost 100 years of operations prides itself in meeting the demands of its diverse international customer base. According to the company's website, BAT also claims to promote "liberal trade, freer movement of capital, and opportunities for companies to transfer skills." It adds that over time the transfer of skills and technologies can "bring many benefits in prosperity, improved living standards and more social equity." (JMR, PMJ)

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