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Business Watch: April 2, 2002


2 April 2002, Volume 2, Number 13
OIL & GAS
STATOIL TO BUY BALTIC SHELL STATIONS (22 March)
Norwegian state-controlled oil company Statoil said on 22 March that it will buy Shell's service stations in the Baltic states. Reuters reported that the price of the deal with the Royal Dutch/Shell group was not made public. "The acquisition, which is conditional on the approval of the authorities in the respective countries, includes 61 service stations in all, 26 in Estonia, 19 in Latvia, and 16 in Lithuania," it said in a statement. Statoil currently runs about 90 of its own petrol stations in the Baltic states under the brand name 1-2-3. (JMR)

ROSTELEKOM REPORTS 2001 PROFIT RISE (28 March)
Rostelekom, Russia's state monopoly long-distance provider, has reported a rise in its 2001 profits. Net revenues totaled 19.23 billion rubles ($617.9 million), while its cost of goods was 11.9 billion rubles ($382.4 million). Its pretax profit totaled 4.11 billion rubles ($132.07 million) and net profits totaled 2.23 billion rubles ($71.662 million). Results are according to Russian accounting standards, which differ significantly from Western ones. The company will report its financial results according to International Accounting Standards, but they come out much later than Russian standard accounts, Reuters reported. (JMR)

GAZPROM SHAREHOLDERS SEEK ANSWERS OVER U.S. GRANT FOR ITERA (26 March)
"The New York Times" reported that minority shareholders from Gazprom are questioning why the U.S. Trade and Development Agency gave an $868,000 grant to Itera Holding in late February. The agency provides funding to American companies to help them gain contracts overseas. The grant was intended to pay BSI Industries of Columbus, Ohio, to conduct a feasibility study of a gas field in northern Russia that Itera owns with Gazprom. But Gazprom shareholders complained that the grant gave a stamp of approval from the American government to a company they say has benefited improperly from asset-stripping at Gazprom. Itera denies this charge. The U.S. agency has now suspended the grant because of the complaints. Leocadia Zak, the agency's general counsel, said that additional information is needed before the money can be disbursed. "Since the grant's approval, questions arose about the ownership of the gas field," U.S. State Department spokesman Richard Boucher said. "So in view of that, Trade and Development Agency put the grant on hold until the issue of ownership has been resolved to our satisfaction. No money at this point has been disbursed for the grant," he added. "Clearly we support transparency, good governance, rule of law, fair treatment of all shareholders, in all sectors, in all companies in Russia, and therefore we want to see these issues resolved before we go ahead with the grant," Reuters quoted Boucher as saying. Transactions between Gazprom and Itera, which has grown to be Russia's second gas producer, have been suspicious and shrouded in mystery. Gazprom extended more than $600 million in loan guarantees to Itera, and some analysts and shareholders have said they believe Gazprom managers secretly enriched themselves or their relatives by transferring Gazprom assets to Itera. Many of these managers have since been removed by Russian President Vladimir Putin. The Russian government is Gazprom's largest shareholder with 38 percent. Itera and former managers of Gazprom said that there were no improper links between the two companies or their executives. (JMR)

RUSSIA WORKS ON 2003 BUDGET (22 March)
Russian Finance Minister Aleksei Kudrin said the government plans to draw up its 2003 budget with a surplus, Reuters reported. He told the Russian State Duma, "We have managed since 2000 to cement the trend of drawing up a budget with an overall surplus.... We are going to maintain the trend in 2003 despite external difficulties." In 2003, Russia is facing high foreign-debt payments. Russia's budget surplus was 1.5 percent of gross domestic product (GDP) in 2000 and a preliminary 2.9 percent last year. This year's budget envisages a surplus equivalent to 1.63 percent of GDP, if the price of oil averages $23.5 per barrel. (JMR)

BUSINESS ALERT
CHILEAN-FINNISH MERGER COULD LEAD TO RUSSIAN PROJECTS (22 March)
A merger between the world's No. 1 copper producer, Chile's state-owned Codelco, and Finnish metals giant Outokumpu could lead to long-term projects in Russia and China. The companies agreed on 21 March to cooperate in technology, joint production projects, and mineral treatment in Chile and other countries. Codelco Development Vice President Juan Enrique Morales told Reuters, "Outokumpu offered us the prospect of developing joint projects in China and Russia, and for that reason we are interested in working together with them." Morales said the new projects might take five to 10 years before they are operational. (JMR)

BAIKAL PULP AND PAPER MILL TO BE MODERNIZED (25 March)
Following a meeting between Russian President Vladimir Putin and the general director of the Baikal Pulp and Paper Mill (PPM), Valerii Glazyrin, it was determined that the mill will be considerably modernized and its specialization changed, RosBusiness Consulting reported. Modernization is necessary to prevent environmental pollution. The current process dumps 140,000 tons of muddy water to the Baikal Lake, the largest lake of Eurasia. Glazyrin noted that with the new process, "the unpleasant smell would disappear." Putin promised to support the mill in getting a World Bank loan for the reorganization (JMR)

RUSSIAN BUSINESS ABROAD
RUSSIA, MONGOLIA SIGN TRADE COOPERATION PROTOCOL (25 March)
Russian Prime Minister Mikhail Kasyanov and his Mongolian counterpart, Nambaryn Enkhbayar, signed a protocol on economic and trade cooperation in 2002 on 25 March, Xinhau reported. The two leaders exchanged views on bilateral relations and cooperation. They also signed a consular pact and a document on frontier inspection. Kasyanov's visit to Mongolia is the first by a Russian prime minister in 31 years. Russian President Vladimir Putin visited Mongolia in November 2000, boosting the development of political relations between the two countries. (JMR)

ECONOMIC NEWS & BUSINESS STATISTICS
UPCOMING CONFERENCES
TURKMENISTAN TO HOST CASPIAN SEA SUMMIT (25 March)
Turkmenistan announced that it will hold a summit in Ashgabat on 23-24 April to discuss the legal status of the Caspian Sea. Iran and Russia, Kazakhstan, Turkmenistan, and Azerbaijan have argued for years on how to divide the Caspian, which experts say could yield as much oil as the North Sea. A government official said the likelihood of the on-again, off-again summit taking place rose after Azerbaijan, Kazakhstan and Russia gave preliminary agreement to attend, Reuters reported. Iranian President Mohammad Khatami also agreed to participate in the summit as part of his official visit to Ashgabat. Iran has insisted that the sea be divided equally in five sections. The other states have said a division should be done by drawing lines from coastlines into the sea, a method that would leave Iran with much less than a 20 percent stake. Russia, Kazakhstan, and Azerbaijan seemed broadly to agree with each other on the coastline variant, although Turkmenistan, angered by the Azerbaijanis developing fields it also claims, has so far withheld agreement. (JMR)

POLITICAL ECONOMY
RUSSIA, FINLAND TO SIGN INVESTMENT PROTECTION TREATY (22 March)
Russia and Finland are expected to sign a long-awaited investment protection treaty, which aims to boost direct foreign investment in Russia. The agreement, which has been in the works for more than two years and faced several delays, could provide a basis for further investor protection agreements between other European Union countries and Russia. The treaty, giving Finnish companies investing in Russia greater rights in Russian courts, was agreed on 21 March. The treaty will be sent to the parliament for approval and could become effective by year's end. Jukka Nysten, an official at the Finnish Foreign Ministry's department of external economic relations, said, "I don't think it will change investments quickly, but it will definitely give a new picture about how Russians feel about foreign direct investment. It will add security to investments in Russia," Reuters reported. Russia hopes the treaty will shore up support for its bid to join the World Trade Organization. (JMR)

BELIEVE IT OR NOT
DANCING BEAR JOINS UKRAINIAN PARTY (27 March)
Ahead of Ukrainian parliamentary elections on 31 March, Ukraine's centrist political party Yabluko registered as a new member a one-year-old dancing grizzly bear called Stefan. Yabluko, known for staging strange stunts before elections, was not expected to surpass the 4 percent hurdle to hold seats in the parliament. The party noted that as an entertainer during six months of campaigning the bear had earned its membership and was now being rewarded, Reuters reported. (JMR)

WHAT'S UP? WHAT'S DOWN?
ESTONIA REPORTS LOWER 2001 UNEMPLOYMENT RATE (22 March)
Estonia's statistics office on 22 March released a report showing that the 2001 average annual unemployment fell for the first time in a decade. The rate was improved due to new jobs in the education, manufacturing, and trade sectors. The rate declined year-on-year to 12.6 percent of the work force in 2001, down from a decade-high 13.7 percent in 2000. The statistics office head of labor market research, Ulle Pettai, told Reuters, "This is indeed the first statistically significant drop in the annual unemployment during the whole time after Estonia won back its independence [in 1991]." The report noted that in 2001, some 703,600 people were considered to be able to work and 401,600, including people considered to have dropped out of the economy, economically inactive. Of those considered able to work, about 614,700 were employed and 88,800 were unemployed in 2001. In 2000, 608,600 were employed and 96,500 were jobless. The office said the jobless rate was still highest, at 22.2 percent, among Estonians aged 15-24, but added the rate declined year-on-year from 23.9 percent in 2000 for the first time since 1996. The Finance Ministry said earlier this week it has revised its unemployment forecast for this year and next to 12.8 percent and 12.7 percent, respectively, down from 13.5 percent forecast for 2002 and 2003 in October. (JMR)

RUSSIAN CPI PREDICTED TO RISE FOR MARCH (28 March)
Russia's consumer prices will show a monthly rise of 0.9-1.1 percent in March after a 1.2 percent increase the previous month, the State Statistics Committee said. Russia's consumer price index (CPI) rose by 1.9 percent, month-on-month, in March 2001, Reuters reported. The committee said the consumer price index rose 0.8 percent from 1-25 March. The average daily inflation in the first 25 days of March slowed to 0.031 percent from 0.041 percent in February and 0.059 percent in March a year ago. According to official estimates, consumer prices are expected to rise 12-14 percent in 2002. Some analysts see this forecast as excessively optimistic after January's monthly inflation jumped 3.1 percent, its highest rate in three years. (JMR)

WHO'S IN? WHO'S OUT?
HEAD OF GM RUSSIA TO RETIRE (25 March)
The head of General Motors' (GM) Russian and Commonwealth of Independent States operations, David J. Herman, was expected to retire on 1 April. A spokesman told Reuters, "No one will replace him because he was charged with setting up a joint venture with AvtoVAZ and the venture is already working." Herman has said the $332 million venture will produce 35,000 cars annually by 2003. General Motors has contributed $100 million to the project to produce cheap Niva off-road vehicles under the Chevrolet brand name. The rest of the financing comes from AvtoVAZ and the European Bank for Reconstruction and Development. (JMR)

PROFILE
SERGEI IGNATYEV: REFORMING THE CENTRAL BANK OR MARKING THE LAUNCH OF THE 2004 CAMPAIGN?
On 20 March, the Russian State Duma approved the candidacy of Sergei Ignatyev for the post of Central Bank chairman. A change in Central Bank leadership is an event of significance which is comparable to a change of governments, "Nezavisimaya gazeta" said the following day. This is important not only in light of the economic consequences. Most importantly, it proves that the country's political course is being altered, the daily stated. The recent history of Russia's "underdeveloped capitalism" shows that a change in the person of the country's chief banker repeatedly has been followed by turmoil in Russia. The changing of Central Bank chairmen in Russia has followed a pattern -� conservative Viktor Gerashchenko was replaced by liberal Sergei Dubinin, godfather of the 1998 default. Dubinin had to hand over his Central Bank duties to conservative Gerashchenko. Last week, Gerashchenko was replaced by Ignatyev.

The pattern of anointing Russian central bankers following Ignatyev's appointment clearly shows that the country is on the threshold of serious changes, "Nezavisimaya gazeta" asserted on 21 March. In 1995, Gerashchenko was forced out by Dubinin one year ahead of presidential elections. Now, in 2002, Ignatyev has replaced Gerashchenko one and a half years before Duma elections and two years before presidential elections.

According to "Nezavisimaya gazeta," the change of Central Bank leaders is likely to jumpstart an election campaign for the following reasons. First of all, the elections will require money, which the Russian government does not really have. Moreover, the history of presidential elections demonstrates that borrowing money from oligarchs is risky business because, following the elections, some have preferred to rule the country rather than to do business. With this in mind, the Central Bank's purse cannot be ignored. To open it, however, an obedient cashier is needed. Gerashchenko was not appropriate for this role �- autarchic, excessively independent, and consequently out of control. Secondly, Russia's external-debt payment is due in 2003, and although optimistic, the government has no idea where it can find $17 billion under circumstances of unstable energy prices. Finally, all elections in Russia are basically carried out by the regions. This situation is widely exploited by governors who "blackmail" the government asking for financial benefits to the regions and promising the "right" electoral outcome. To keep regional leaders satisfied, the government has to generously finance the regions from the coffers of the Central Bank.

To access gold reserves collected by Gerashchenko, on the other hand, the government needs a "reliable" or "nominal" chairman. According to "Nezavisimaya gazeta," Ignatyev fits this role perfectly. He has already announced that the current monetary and exchange-rate policies are "well-grounded" and will not be tinkered with in "the next few months," AP reported. Ignatyev said there is no reason to alter the government's ruble and inflation targets for 2002, and he also defended the government's ruble target of an average rate of 31.5 to the dollar for the year. Although largely following the policies of Gerashchenko, Ignatyev represents Central Bank accountability to the government and parliament.

Sergei Ignatyev was born in Leningrad in 1948. He graduated from Moscow State University with a degree in economics. In 1978�88, he taught economics at the Leningrad Institute of Soviet Trade. In 1988�91, Ignatyev was a professor at the Leningrad Institute of Economy and Finance. Unlike other new members of Putin's team, he had no relations with the St. Petersburg administration when Putin was a deputy to former Mayor Anatolii Sobchak. In 1991�92, Ignatyev was a deputy minister of economy and finance. In 1992�93, he served as a deputy to then-Central Bank Chairman Gerashchenko. According to the National News Service, Gerashchenko was actively involved in Ignatyev's removal from this post, thus suggesting the two men were opponents rather than associates. Ignatyev joined the Finance Ministry again in 1993 as a deputy minister, and in 1997 he was promoted to first deputy with a wide range of responsibilities. He also worked as an economic adviser to President Boris Yeltsin in 1996-97. Since 1997, he has been involved in almost every major issue at the Finance Ministry, including internal and external debt, budget revenues, international financial organizations, and macroeconomic policy. He also headed campaigns against the tax-evasion schemes being used by big oil companies, established good relations with the International Monetary Fund (IMF) and the World Bank, and was responsible for macroeconomic stability, AP reported. On 15 March, President Vladimir Putin submitted his name as a candidate to the post of Central Bank chairman. On 20 March, Ignatyev was approved by the Duma by a vote of 290 to 40. He will inherit a bank with international reserves equaling $37.4 billion as of 15 March.

Despite being near the center of power for the past decade, Ignatyev is little known outside the world of economics, where he has a reputation as a serious, diligent, and intelligent professional. According to "Kommersant," Ignatyev was never a prominent public figure or a participant in any major scandal, which increases the government's chances of transforming the Central Bank into an obedient structure. "Vedomosti" described Ignatyev as very careful -- and sometimes overly cautious -- in his decision-making. According to Ignatyev's former colleagues at the Finance Ministry, he never looked for publicity but has always been an adamant "fighter" for his professional beliefs. Russian Finance Minister Aleksei Kudrin described Ignatyev as a man of honesty and principles. "He does not take bribes and does not care about money in general," said Mikhail Matovnikov, deputy director general of the Interfax Rating Agency, which monitors the banking industry. "For Russia it is so unique and surprising in a good sense, like marrying for love," Matovnikov said. One source who knows him well offered anecdotal evidence of Ignatyev's standards of conduct: When a prestigious non-governmental organization invited Ignatyev to participate in a conference -- all of whose participants were provided a small honorarium -- Ignatyev refused to accept the money on the grounds that it would violate certain regulations. The source added that "corruption is inconceivable to this man."

Although described by the press variously as a "strong professional," "a good economist," a "highly qualified and meticulous professional," and experienced, honest, etc., many agree that as the head of the Central Bank, Ignatyev will be a nominal figure, not a political player, "Vremya Novostei" reported.

Chances are high that this prediction will prove correct. Judging by Ignatyev's first interviews, a "healthy conservatism is not harmful to such sensitive structures as the Central Bank." When asked by "Vedomosti" about possible structural changes at the bank, Ignatyev stated that, "There is no need to break apart the existing order." Oleg Vyugin, Ignatyev's former colleague from the Finance Ministry, told "Vremya Novostei" that "a lot will depend on the Central Bank team of professionals that Ignatyev will bring over." It appears that Ignatyev is in no hurry for the personnel changes, either. Commenting on Gerashchenko's team at the bank, he told "Vedomosti," "The most important thing is that the majority of these people are strong professionals, and you can always find common ground working with them."

Given Ignatyev's reluctance for changes, badly needed Central Bank reform in Russia might be postponed indefinitely. This could be disastrous. The Central Bank employs a huge number of people, between 80,000 and 90,000. According to "The Moscow Times," this makes Russia's Central Bank "the largest national bank per capita in the world." During his tenure as chairman, Sergei Dubinin earned twice the salary of U.S. Federal Reserve Chairman Alan Greenspan. The Russian Central Bank spends up to $700 million annually on computer equipment alone, according to commentator Yulia Latynina, who further describes Ignatyev as suffering from pathological professional integrity.

But with a "convenient" new chairman at the Russian Central Bank, the government might feel considerable relief, at least of the temporary sort, ahead of elections. (TSK, PMJ)

IN FOCUS
TAX POLICE ACCUSE GAZPROM OF TAX EVASION (13 March)
On 12 March, the chief of the Moscow Department of the Federal Tax Police (FTPS), Lieutenant General Viktor Vasilev, said his department is conducting an investigation into Gazprom for "non-payment of taxes on gas used for internal needs, sales of gas at an artificially low price, and under-reporting revenues," "Kommersant" reported. The FTPS is accusing Gazprom of evading more than 30 billion rubles in tax liabilities during the period of January 1999 to July 2001. "Kommersant" and "Vedomosti" reported that the taxes in question are on gas-export revenues and on gas that Gazprom produced for its own needs. The investigation was expected to be completed by the end of the month. Gazprom has denied evading taxes. The same day, Gazprom Deputy Chairman Vitalii Savelev released a statement saying: "It is not ethical to announce the results of an audit which has not yet been completed. Such reports can hurt Gazprom's reputation, at home and abroad. Officials must understand what consequences their hasty conclusions may have for the nation's business." Following the Tax Police announcement and rumors that Chairman Aleksei Miller would soon be dismissed, Gazprom shares fell 8.3 percent, representing more than $1.1 billion in capital, in one day. Miller did go on leave on 11 March, but returned on 22 March. His duties were carried out by Savelev in the interim.

Another dispute is brewing over control of the Achimovskoye gas field. Itera claims it acquired a 49 percent stake in the Russian field, but a study by PricewaterhouseCoopers found that Gazprom had sole ownership rights to the field. This could considerably affect the total value of Gazprom assets within this tax investigation. The Achimovskoye field, estimated to hold 354 billion cubic meters of gas, was set to undergo a feasibility study by BSI Industries. The U.S. Trade and Development Agency grant for this study has been suspended (see item above). Gazprom minority shareholders have called for more transparency in the relations between Gazprom and Itera. Itera spokesman Nikolai Semanenko said, "Itera and Gazprom are two independent companies with no relation to each other," "The New York Times" reported on 27 March.

"Kommersant" reported that the FTPS actions are a return to the practices of 2000 and 2001, whereby the Tax Police would use intimidation and threats to force large companies to pay taxes. It added that FTPS may not be able to meet its collections target for the first quarter of 2002 due to low oil prices and therefore may be requesting a resumption in the practice of advance payments to the budget. Vasilev's investigation may also be another battle in the war for control of Gazprom within the president's team. Vasilev is from St. Petersburg and a former intelligence agent, while Miller is an appointee of President Vladimir Putin, though Miller's removal has been rumored for many months. Miller pledged to clean up Gazprom's financial reputation. Gazprom has threatened to file a countersuit if the Tax Police do not withdraw their accusations. The actions of the Tax Police raise questions as to who the tax police are ultimately reporting.

Gazprom, while privatized on paper, is for all intents and purposes a government entity. The Russian government controls the board of directors and has appointed a political crony of the president's. Miller is a man without an energy background or significant managerial experience. As a company, it still appears to be contending with holdovers from the Soviet era, whose management style leaves something to be desired. Gazprom, through its deals with Itera, has turned a small energy-trading company into a global player and received nothing tangible in return. In fact, Gazprom has diluted its assets. Other controversies point to insider trading, where relatives of senior management received shares for less than their market value. When Gazprom is compared with energy powerhouses like LUKoil and Yukos, the differences are illustrative and overwhelmingly clear. LUKoil and Yukos have grown in value and become international business forces based on their performance and improved management. This has largely been the product of Western managerial influence and assimilation into the international business milieu. Gazprom is meanwhile losing value and remains under Russian government control. The implications are clear, but the future remains cloudy. (JMR, PMJ)

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