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Business Watch: January 22, 2002


22 January 2002, Volume 2, Number 3
OIL & GAS
BUSINESS ALERT
SIXTY PERCENT OF RUSSIAN BUSINESSES FAIL TO PAY TAXES (8 January)
The head of the Moscow office of the Federal Tax Police Service (FSNP), Viktor Vasiliev, noted that 60 percent of Russian enterprises, companies, and institutions do not pay taxes or other obligatory duties and thus constitute a "shadow segment of the national economy." In some sectors, such as automobile servicing, for example, the level of illegal revenues exceeds 80 percent, "RFE/RL Newsline" reported. Vasiliev said that through research and practical experience the FSNP has found that most tax crimes are committed in the energy sector, credit and financial institutions, real estate, consumer trade, and export-import operations. (JMR)

LITHUANIA TO PURCHASE ANTITANK SYSTEM (11 January)
Lithuania has agreed to purchase the Javelin antitank weapon system produced through the Raytheon-Lockheed Martin Javelin Joint Venture. The U.S. Army has executed a letter of agreement allowing the sale. This is the first sale of a Javelin system to a European country, and it is expected to result in an award to the joint venture of $10 million. The Lithuanian sale includes more than 75 missiles and 18 command launch units, training devices, logistics support, associated equipment, and training. John Weinzettle, U.S. Army Close Combat Missile Systems (CCMS) project manager, explained, "Javelin's multimission capabilities give infantry soldiers the means to engage alternate targets, such as field fortifications, buildings and helicopters. Javelin also provides interoperability with U.S. and other forces in times of crisis." The Javelin medium-range, antitank missile system is billed as the world's first one-man transportable and employable fire-and-forget anti-armor missile system. (JMR)

RUSSIAN BUSINESS ABROAD
RUSSIAN ECONOMIC STATISTICS (8 January)
The State Statistics Committee said in a report that consumer prices in Russia rose 18.6 percent in 2001, exceeding government targets. Russia said earlier in the year that it would hold inflation to between 12 percent and14 percent, after a 20.2 percent figure in 2000, in order to ensure public purchasing power, a key component of national growth. The consumer price index edged up 1.6 percent in December compared with November. Economic analysts have advised Russian President Vladimir Putin's government that inflation will come in at 12-14 percent in 2002. Finance Minister Aleksei Kudrin has described inflation as "the principal curse" of the Russian economy, pledging that the government will remain "very firm" on spending. Natalia Orlova, an analyst with Alfa Bank, said, "We think that continuing structural reform is going to lead to price rises for at least the next two years. For this year we see inflation at 16 percent." (JMR)

POLAND AIMS TO REDUCE TRADE DEFICIT WITH RUSSIA (10 January)
Andrzei Zaluski, Polish ambassador to Russia, said in an interview with ITAR-TASS that Poland hopes to reduce its trade deficit with Russia by taking part in the transit of Russian energy to the West across its territory. Russian President Vladimir Putin will visit Poland on 16 January. According to Zaluski, the trade imbalance in favor of Russia amounts to $3 billion. "It is a big problem which goes beyond the framework of [the] economy. It cannot be resolved without some special instruments, without the support of executive bodies," Zaluski said. "The effectiveness of cooperation between Russia and Poland could be improved by modernizing the communications connecting the two countries." The modernization could be started with the Moscow-Minsk-Warsaw-Berlin railway, and the railway could be extended eastward, he added. (JMR)

KASYANOV PREPARES NEW ECONOMIC PLAN (8 January)
Russian Prime Minister Mikhail Kasyanov is preparing a new economic plan, aimed at stability for the period 2002-04, which will be presented to President Putin in February, ITAR-TASS reported. In 2002, Russia is to retire $14.5 billion in external debt. Kasyanov said he is confident that Russia will meet these payments. The program will also target the timely payment of wages and salaries to workers in the state sector and the military. The government is working to draft legislation in line with the international community and the World Trade Organization guidelines. A new committee for financial monitoring has been formed to prevent money laundering. The government will also continue the effort to reform natural monopolies and consistently develop education and the natural sciences, which President Putin described as the "resource of our development." (JMR)

ECONOMIC NEWS & BUSINESS STATISTICS
WILLIAMS YUKOS RESUMES EQUITY-FOR-CRUDE TALKS (15 January)
U.S. energy group Williams International on 15 January resumed negotiation with Russian oil company Yukos to provide oil to Mazeikiu Nafta, Williams Lietuva spokesman Darius Silas told Reuters. The talks will also include discussions over the long-term crude supply agreement to the Mazeikiu refinery "under the terms and conditions previously agreed in June 2001." This agreement would give Yukos a 26.75 percent stake in Mazeikiu Nafta -- which is one-third owned and operated by Williams -- in exchange for a 10-year supply of at least 4.8 million tons of crude per year (96,000 barrels per day). The two parties called off talks in December that Williams described as "deadlocked negotiations;" meanwhile, Yukos said the disagreements were "of a legal character" and proposed changing negotiating teams to advance the talks. A crude-supply deal is key for Mazeikiu to win some $400 million in financing to upgrade the sole refinery in the Baltic states to Western standards. Mazeikiu refines some 500,000-600,000 tons of Russian crude per month, around 400,000 tons of it from Yukos. (JMR)

RUSSIA'S ECONOMIC GROWTH IN DOUBT (9 January)
The extent of Russia's economic growth is in doubt as 2001's preliminary figures are being calculated. In addition to news from the State Statistics Committee that prices in Russia grew by 18.6 percent -- surpassing Economic and Trade Minister's pledge to keep inflation below 18 percent -- a boost in pensioners' incomes by an average of 20 percent has been called into question.

Neither the president nor the prime minister, particularly on their foreign trips, have tired of talking about economic growth in Russia. But in fact, it seems that there is none. There was none in October, when, according to official statistics, gross domestic product (GDP) was stagnant. GDP in November came to 821 billion rubles ($26.8 billion) against a figure of 857 billion rubles a month earlier -- signaling that stalled growth has been replaced by falling production, BBC reported. The Kremlin cites seasonal factors; this is an incomplete but typical explanation. It demonstrates once again the Russian economy's dependence on world raw-materials markets. It turns out that the high growth rates in the spring and summer were the result, not so much of domestic efforts and achievements, as of increased oil exports and seasonal factors. (JMR)

UKRAINE PRIVATIZATION RAISES $400 MILLION (8 January)
Ukraine's government announced that privatization revenues totaled 2.124 billion gryvnias ($400 million) last year, just over one-third of its initial target. Sales in the energy and telecommunication sectors failed. The State Property Fund expected to raise 5.9 billion gryvnias in 2001, but the program suffered a blow when President Leonid Kuchma ordered a freeze in the energy sector sell-off. The International Monetary Fund (IMF) and the World Bank are urging the government to step up its privatization efforts to turn inefficient and unprofitable companies around and help support the nation's economic recovery. The State Property Fund will focus on selling Uktelekom and 12 electricity distributing companies. The government expects to raise 5.8 billion gryvnias in 2002, Reuters reported. The previous government, headed by reformer Viktor Yushchenko, had started privatizing the energy sector and sold six utilities to U.S. group AES Corp and Slovak energy company Vychodoslovenske Energeticke. But Yushchenko was forced to step down last year during a political crisis. Analysts have cast doubt on the government's privatization plans, saying it will have to delay major sales until the second half of the year due to a parliamentary election in March. (JMR)

POLITICAL ECONOMY
OIL PRICES CONTINUE TO FALL (11 January)
Lingering doubts that Russia will fail to fulfill its oil-cuts commitment have prompted U.S. oil prices to fall. February crude on the New York Mercantile Exchange (NYMEX) ended 3 percent lower, dropping 70 cents to settle at $19.68 a barrel. That pushed crude oil prices down by nearly $2.00 a barrel on the week, Reuters reported. Russia has decided to lift restrictions on fuel oil exports from its Baltic and Black Sea ports despite its agreements with the Organization for Petroleum Exporting Countries (OPEC) to boost prices by limiting supplies. Russia promised to cut back on its booming oil exports, currently around 3 million barrels per day (bpd), by 150,000 bpd from 1 January as part of the producers' deal to slice nearly 2 million bpd from the 76 million bpd world market. Oil traders have expressed concerns that Russian oil cuts will be temporary as new private firms increase processed exports in lieu of fuel exports. Most Russian oil firms have said they will not change their ambitious plans for output growth this year; the country's sixth-largest oil producer, Sibneft, said its output will increase 26 percent in 2002. (JMR)

OLIGARCHS SAID TO CONTROL ELECTIONS (6 January)
In an interview with "Novoe Vremya," Dmitrii Oreshkin, the director of the Merkator research center, said LUKoil is "very active" and quite often "successful" in regional elections. According to Oreshkin, the company does not care if the candidate leans to the left or right. For example, the company supported Governor Nikolai Maksyuta in Volgograd Oblast, Governor Vladimir Yegorov in Kaliningrad Oblast, and Anatolii Yefremov in Arkhangelsk Oblast. According to Oreshkin, LUKoil's conscious "corporate strategy" is that is it necessary to control the largest regions to protect its business, and "it does this through elections." He continued, "Earlier there was a covert lobbying system, but now it is more or less done legally through elections. In this, there is the obvious sadness because voters in the best case are invited to rubber-stamp the result of an agreement between oligarchic structures. But this is a positive moment, because nonetheless the voters are appealed to. Before, no one asked them anything," "REF/RL Newsline" reported. (JMR)

RUSSIAN GOVERNMENT RETURNS CARMAKER SHARES (8 January)
The Russian government has formally approved the return of a 50-percent-plus-one-share stake in the country's biggest carmaker, AvtoVAZ, Reuters reported. The shares are being returned to the firm, which builds Lada and Niva cars, as part of a new restructuring plan for tax debts owed by the company. The stake was taken by the government in 1999 as collateral for the debt, but the government has now decided the company needs to be control the shares to raise funds. Company management has said it can use the stake as collateral for loans to modernize its production facilities and its product line and attract investment. Analysts have also said the company might sell some of the shares to a strategic investor. The return of the shares has involved a restructuring of the tax debt, which amounts to around 8 billion rubles ($262 million), to bring full repayment by 2011. AvtoVAZ produced about 765,000 cars in 2001. (JMR)

UKRAINE AIMS TO RESOLVE VAT OBJECTION (9 January)
Ukraine's government has announced measures to resolve its dispute with the International Monetary Fund (IMF) over the estimated 6 billion gryvnias ($1.1 billion) of value-added tax (VAT) refunds owed to exporters. Mykola Azarov, head of the state tax administration, told Reuters the government plans to partly repay the debt with gas and electricity supplies in a bid to defuse a dispute that is blocking the resumption of IMF lending. Newly appointed Finance Minister Igor Yushko said a working group would be formed this week to prepare the ground for changes to the laws on the payment and refunding of VAT. The IMF has postponed the release of a $375 million installment this month, citing the VAT problem. Some economists say the VAT debt has not been properly accounted for in Kyiv's budget and could inflate its deficit target for 2002 to far beyond the current target of 1.7 percent. (JMR)

PUTIN'S 'TO DO' LIST FOR 2002 (11 January)
Russian President Vladimir Putin is proud of his accomplishments in 2001, but is ready to achieve more in 2002. He aims to tame Russia's "bandit capitalism" and recreate a welfare state. "The Times" reported that using the vast sums Russia is earning from oil exports, Putin is attempting to give Russians "capitalism with a human face," showing them that private enterprise does not mean simply the creation of a small corrupt class of super-rich oligarchs and the impoverishment of millions. He faces challenges such as renewing vital infrastructure, repairing its crumbling hospitals and leaking schools, legalizing the sale of land, reforming its courts and clarifying its laws, guaranteeing proper pensions for the elderly, and giving workers the social protection they have in the West. Putin will have to focus on the myriad of laws, regulations, payments, and reforms that are needed to make the market system work. He will also work to raise the salaries of state workers. The salaries of state employees -- teachers, doctors, civil servants -- still about 10 million people, have fallen way behind the 60 million employed in the private sector. They are to get pay rises of 20 percent from this month. (JMR)

PUTIN TO CLEAR OUT YELTSIN-ERA COBWEBS (11 January)
"The Wall Street Journal" reported that Russian President Putin is attempting to tidy up the relationship between Russia's big state-owned companies and the government. Analysts believe the Russian president is doing away with Yeltsin-era handshake agreements by which the state allegedly turned a blind eye to criticisms of mismanagement in exchange for key financial and political support at election time. Some speculate that Putin appointees will act no differently than the Yeltsin predecessors and may soon be pursuing business opportunities for their personal gain. Christopher Granville, a political analyst with United Financial Group in Moscow, calls it "the shunting of the clans." Putin, he says, is trying to "disentangle private family businesses from state bureaucracies and state-owned companies" with the goal of establishing "more normal bureaucracies, engaged in proper regulation, and more normal businesses run in the interests of shareholders, whether state or private." The newspaper reports that the targets are vast enterprises still owned or controlled by the state, which in the Yeltsin era were never transformed into efficient, profit-oriented companies. Managers at the helm were free to shuffle assets, cash, and fat contracts to outside firms owned by their relatives, so long as they financed election campaigns and favorable media coverage for the Kremlin. Putin's efforts began last summer with power changes inside Gazprom and continued last week with the investigation into the possible illegal activities of Sibur executives. Analysts say Putin's strategy is to make businessmen afraid to commit new crimes, rather than to punish them for old ones. (JMR)

BELIEVE IT OR NOT
ARMENIAN BOBSLEDDERS PRACTICE ON SAN JOSE STREETS (11 January)
While the favored Swiss and German bobsledding teams use custom-built sleds and train virtually year-round on ice-covered tracks, the Armenian Olympic bobsledding team is practicing on Welch Avenue in a middle-class San Jose neighborhood, without snow and the proper equipment. Neighbors have reacted: "They're crazy. We don't have any snow here. But I hope they win. They'll make our block look good." Team members Dan Janjigian and Yorgo Alexandrou have said that competing at the Salt Lake City Olympic Games will be triumph enough for these best buddies. Joe Almasian and Ken Topalian finished 36th at the Lillehammer Games, with a mixed Armenian-American roster. "Being of Armenian heritage, it's always nice to see your country represented," Almasian says. "And I'd like to think we paved some of that road and have given some inspiration to Dan," AP reported. (JMR)

WHAT'S UP? WHAT'S DOWN?
UKRAINE'S INDUSTRIAL OUTPUT RISES (9 January)
Ukrainian Deputy Prime Minister Vasyl Rohovyy told journalists that Ukraine's industrial output grew by 14.2 percent in 2001, year-on-year, UNIAN reported. This is the highest growth rate since Ukraine declared independence in 1991. In 2000, Ukraine posted industrial growth of 12.4 percent. The State Statistics Committee reported that Ukrainian farmers harvested 39.7 million tons of grain last year, significantly surpassing the 2000 harvest of 24.8 million tons, "RFE/RL Newsline" reported. (JMR)

RUSSIAN GOLD OUTPUT CONTINUES TO RISE (16 January)
Valerii Braiko, chairman of the Russian Gold Industrialists' Union, announced that Russia's gold output could rise to 170 tons this year from 153 tons in 2001. He explained to Reuters, "An increase of mining capacities in the eastern part of the country will account for the gold-output rise." He said the union expected gold-mining companies to increase production to 158 tons this year from 140 in 2001. The remaining gold will be produced as a secondary metal and as a by-product from other metals output, he added. Braiko also noted that the government is expected this month to lift a 5 percent gold-export tariff. (JMR)

PROFILE
ROBERT CHRISTIAN: LAUNCHES NEW CAUCASUS AIRLINE
"The Georgian Business Week" reported on 13 January that a new regional airline, called Silk Route Airways, has begun operations in Georgia. The general manager of the new airline, Giorgi Lashkhi, said the airline was registered in September 2000 with 60 percent of shares in the hands of the Georgian company Samgori-94 and 40 percent held by its American partners. The prime mover of this new venture was Robert Christian. He is the owner of Pacific Island Aviation (PIA), a regional airlines based in Saipan, an island servicing Japan and a number of Pacific islands including the American island of Guam. PIA is registered in the Mariana Islands (near Japan) and was founded 15 years ago by Christian. PIA is a registered American international airline. American multibillion-dollar defense and aerospace company Lockheed Martin provided the project's financing. Samgori is also active in cigarette distribution and meat importing, among other things (see "RFE/RL Business Watch," 15 January 2002).

The story of Silk Route Airways and how Robert (Bob) Christian found his way to Georgia from an island off the coast of Japan is illustrative of today�s' global business realities. In January 1999, Christian was invited to Georgia by William Schierlberl, the legal counsel of Houston-based Transoceanic Shipping Company. Transoceanic, a company providing support services to Western oil companies operating in the Caspian, was attempting to facilitate the oil companies' need for regional transportation between Azerbaijan and Georgia. Energy development and pipeline-construction projects were creating increased and timely transportation requirements that were not being met. Roads are in a terrible condition and dangerous. Rail links take too long. Today, with no regular flights available between Azerbaijan and Georgia, especially the Black Sea ports of Poti and Batumi, the ability of companies to do business efficiently in the region is complicated. Transoceanic Shipping immediately comprehended the need to fly between the capitals and the ports located on the Caspian and on the Black Sea. A regional airline quickly became a requirement; but how to manage, run, and fund it became the real challenge.

William Schierlberl, of New York City, had heard of Christian and his regional airlines from Japanese business contacts. A Japanese business acquaintance of Schierberl's had described Christian as a professional pilot and manager who could make unconventional projects work in unusual places. Schierlberl contacted Christian and invited him to Georgia. After the Georgia trip, Schierlberl realized that Christian was the man for the job. Christian, a helicopter pilot and a veteran of the Vietnam War, had worked internationally and had experience managing a multi-ethnic workforce. As an American expatriate living in Saipan with a successful regional airline, Christian appeared to be looking for a new challenge. Christian's Saipan-based airline, PIA, was virtually functioning on autopilot, according to a Japanese source familiar with Christian and his company. The assessment proved correct, and it didn't take long for Christian to realize that Georgia had a need and some powerful supporters. In Christian's first meeting with U.S. Embassy officials, the reaction was "over the top" for the prospects of a regional airline in the region. Christian, a decisive man, quickly assessed the opportunity. Risk aside, the need for an air service was clearly there. This offered the new challenge he was looking for. But of all the places in the world to set up a new airline, why did Bob Christian choose Georgia? His background helps answer the question.

Christian left the U.S. military in 1977 and moved from his home in Seattle to Hawaii. In 1978, he became involved in the airline business as chief pilot and director of flight operations for a local commuter airline on the island of Maui. Since then, Christian has functioned as a CEO, taught at Embry Riddle Aeronautical University, and worked as chief pilot for various airlines in the Hawaiian Islands. In 1985, Christian took Maui Airlines to the island of Guam in the Pacific and established a regional air carrier.

In 1988, a Japanese business group invited Christian to establish a new U.S. flagship (FAA: 14CFR121) international airline. The purpose was to blend Japanese interests with the local economy, and the project would become the model for Christian's later decision to establish an American-backed airline in the Caucasus. That airline became Pacific Island Aviation (PIA). PIA's success came quickly. In 1993, PIA entered a code-sharing agreement with Continental Airlines, allowing for joint sales and transfers. A similar code-sharing arrangement was entered into with Northwest Airlines in 1995, providing service to Guam. The airline continues to offer extensive services to the Marianas and Japan.

Christian's trip to Georgia convinced him that oil interests could be blended into the Georgian economy. If Christian could find the financing, he could provide regional airline services that could meet Western standards in the region and still provide the local population with discounted travel rates by filling excess capacity. He quickly decided on the plane: a fast, fuel-efficient, modern turbo-propeller plane -- the Brazilian-made Embraer-120. The airplane is equipped with Colin avionics and Pratt Whitney engines, all from the U.S., and can carry 30 passengers. It travels at 650 kilometers an hour and has a modern cockpit with full autopilot. He believed the aircraft was the perfect fit for a new regional airline in the South Caucasus.

In September 2000, after many trips and meetings with Georgian officials, Silk Route Airways was established. The Georgian partner was the company that proudly described itself as the country's largest taxpayer, Samgori-94. Staff was hired in the fall of 2000, and plans were implemented to establish a managerial and administrative team. Personnel were sent to Saipan to be trained at PIA and see first-hand the standards and methods of an international airline. Training was undertaken for pilots, maintenance crews, and accountants, including flight-simulator training in France. But the real challenges would come as negotiations over the financing bogged down and dragged on with a number of potential investors and banks.

Christian eventually negotiated a successful loan agreement with Lockheed Martin, which was committed to carrying out a pledge made to President Eduard Shevardnadze to facilitate the creation of a regional airline in Georgia. Through the efforts of both parties and the cooperation of the Georgian Transportation Ministry, the hard work paid off with the arrival of the first plane in Georgia -- leased from the KLM Exel fleet in the Netherlands on 28 December 2001. The next plane is scheduled to arrive in late January. Flights are set to begin in mid-February, with daily routes to Baku, Azerbaijan, and three flights a week to Batumi, Georgia and Yerevan, Armenia.

Already, the implications of the new airline are being felt. Solomon Pavliashvili, minister for state property management, announced at a government session on 9 January the need for privatizing Georgian Airlines because of the losses incurred by the state carrier. In his opinion, the situation can only be improved by the rapid sale of the company to a private investor. And he is not the only one calling for the sale of the state airline. The World Bank also insists on privatizing Georgian Airlines. In the meantime, Georgian Airlines representatives have announced its intention to cooperate with Silk Route Airways. One source indicated that Georgian Airlines intends to code-share seats on the Silk Route Embraer-120 for regional flights currently flown by Georgian Airlines' YAK 40 aircraft. This will dramatically reduce fuel costs and substitute a newer aircraft on flights to Turkey, Russia, and perhaps Ukraine. Already, speculation has started that Christian will take over Georgian Airlines.

Christian says he enjoys the people of Georgia for their expansive ways of living life. He knows, however, that while this can be appealing from a lifestyle perspective, it does not immediately translate into a successful business formula. Christian once described Georgian conditions as somewhere between Sicily and Japan. He hopes that Georgia can become an important regional hub for airlines and that his airline can help make that happen by ferrying passengers within the region. By providing services at Western standards, he believes the market can rapidly develop. "Georgians recognize they need this type and level of service," said Christian. "I have developed an excellent working relationship with the government and am confident of success." Christian readily admits that there are many problems to be faced and that "no one size fits all," but as long as both parties maintain "mutual respect" he says he can work things out and introduce Western standards and procedures with the new airline. Diplomats and foreign business are keeping their fingers crossed in hopes that the airline succeeds. One businessman remarked, "Silk Route Airways might take '[You] can't get there from here' out of my vocabulary."

Bob Christian is a newcomer to the business world in Georgia. Only time will tell whether his experience will be different from that of entrepreneur-importer Fady Asly (see "RFE/RL Business Watch," 15 January 2002). Since those men know each other, they no doubt will share their experiences and compare various approaches to conducting business in Georgia. Clearly the import business is different from that of running an airline. Moreover, the sectors attract different kinds of competitors: The import business and retail sales have traditionally attracted criminal interests, particularly in the developing world. Operating small planes in a regional environment need not represent a direct threat to large air carriers involved in the "long-haul" business. By coordinating their route schedules, such airlines can even help keep each other prosperous.

However, reports of financial troubles at the Georgian national air carrier could complicate Christian's plans for his regional airline feeder service. Any collapse of these national flagships could bring Christian into conflict with other forces that do not want foreign involvement to complicate their business. On the other hand, the Georgian government will no doubt want a Georgian airline flying internationally to Europe. Managing these conflicting business models may place this new airline in a difficult early position, but only time will tell. (PMJ)

IN FOCUS
PROSECUTORS INVESTIGATE SIBUR EXECUTIVES (11 January)
Russian prosecutors have launched an investigation against three top executives from a Gazprom subsidiary, Siberian-Ural Petrochemical and Gas Company (Sibur), accused of stealing 2.6 billion rubles ($85 million) via illegal sales of assets through affiliates.

Sibur President Yakov Goldovskii and its chairman, Vyacheslav Sheremet, were detained on 9 January. Both have been linked to former Gazprom chief Rem Vyakhirev, whom Russian President Vladimir Putin replaced last May with his loyalist Aleksei Miller. Leonid Troshin, a spokesman for the Prosecutor-General's Office, would not name the third executive, but Russian reports identified him as Sibur Vice President Yevgenii Koshchits. All three will be charged with abuse of office and embezzlement of funds, but no charges have yet been filed. Russian prosecutors on 11 January released Sheremet on condition that he not leave Moscow, but kept Goldovskii and Koshchits in custody, AP reported. Under Russian law, prosecutors have three days to charge or release suspects. But the Prosecutor-General's Office said Goldovskii and Koshchits will remain in detention for another 10 days under a special extension. The Russian media reported that Goldovskii had used Sibur to funnel assets out of Gazprom, leaving behind a debt of about $655 million.

The investigation focuses on the sale of Surgut by Sibur to oil major Surgutneftegaz in late December. The sale has been completed, but it is unclear whether the 2.6 billion rubles ($85 million) has been paid. These valuable assets belonged not to Sibur but to affiliated structures not necessarily owned by Sibur. It should be noted that much of the asset-reshuffling at Sibur received approval from Gazprom managers. Steven Dashevsky, oil analyst at Aton, said, "Sibur has no equity in Sibur-Tyumen [the firm that formally owns the Surgut refinery], but maintains full operational control. It thus had no legal claim to the sales proceeds, but in reality was free to use the funds at its discretion," "The Moscow Times" reported. The money from the sale would go toward paying off Sibur's $827 million debt to Gazprom. However, it is unclear how Gazprom could force the sale if it had no control of Sibur-Tyumen through the Sibur holding company. Prosecutor-General Vladimir Ustinov said his office intends to interrogate more Gazprom executives, widening the investigation. "We have plans to interrogate a group of former and current Gazprom managers," Ustinov said.

The detentions and investigations reflect Putin's call on Gazprom to have a closer look at how its assets are managed. "You must pay close attention to the ownership issue.... If you sit with your mouth open, you will lose not only Sibur, but other companies too before you have time to look around," Putin said in November. According to the Prosecutor-General's Office, Gazprom requested the investigation and provided compromising material, RosBusiness Consulting reported. On 8 January, prosecutors raided the offices of Sibur, a day ahead of a planned shareholder meeting which failed to take place due to the lack of a quorum. Gazprom said its representatives and other shareholders did not attend the meeting because it was decided that Sibur's founding documents must be brought in line with requirements of a new Russian law on joint-stock companies that took effect this year.

The new law envisages that a company's chief executive is elected by shareholders with at least 50 percent of its stock, not 75 percent as stipulated in the old legislation. Gazprom owns a 51 percent stake in Sibur, and the new law would allow it to name a new chief executive to replace Sibur Chief Executive Goldovskii, AP reported. Russian media reported that Gazprom wants to cut Sibur's executive board from 17 to nine members, putting five of its own representatives on the board -- including Bernhard Walter, former chairman of Germany's Dresdner Bank. In an interview with "Vremya Novostei," Walter said he had accepted Gazprom's proposal to become its representative on Sibur's board. Gazprom spokesman Aleksandr Dybal told RTR the raid was not connected with the meeting, but confirmed Gazprom is seeking a "restructuring" at Sibur.

Sibur was established in 1995 by a presidential decree to stem the disintegration of the petrochemical industry in Russia. Sibur makes and sells everything from liquefied petroleum gas to synthetic rubber and tires. Gazprom took a controlling stake in Sibur in 2000, but lacked the necessary votes on the Sibur board to prevent the petrochemicals firm from selling off assets.

The latest investigation appears to be part of Putin's larger campaign to crack down on corruption in business, thereby removing major power players. The Prosecutor's Office has long been used by the Kremlin to root out corruption in industry which, despite privatization on paper, remains closely connected to politics. (JMR)

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