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Business Watch: July 16, 2002


16 July 2002, Volume 2, Number 28
OIL & GAS
BRITISH COMPANY SUPPLIES CASPIAN PIPELINES (9 July)
Shipping company Volga-Fleet shipped 18,000 tons of pipes on the Volga River from France to Azerbaijan in June. In May, Volga-Fleet signed a contract with British company Bertling to ship 180,000 tons of steel pipes to be used for an oil-pipeline project. The June shipment was the first of its kind, reported the "Skrin Issuer." According to Bertling management, it is necessary to construct the pipelines such that they allow quality oil and gas transmission to the reservoirs and consumers. (IAM)

PLAN TO CONSTRUCT WEST-EAST PIPELINE THROUGH CHINA (5 July)
The first "West-East" gas pipeline through China will be built by Russia's Gazprom, Royal Dutch Shell, ExxonMobil, and PetroChina, Rosbalt.com reported on 5 July. The agreement, which was signed in Beijing on 4 July for a 45-year term, provides PetroChina a 55 percent share in the joint venture, while Gazprom, Royal Dutch Shell, and ExxonMobil each maintain 15 percent shares. The West-East venture seeks to develop gas fields in China's Tarim region and to construct a 4,000-kilometer pipeline. According to Gazprom board Deputy Chairman Aleksandr Ananenkov, the project will benefit both Chinese residents and industry. Initial steps toward the implementation of the West-East project were taken in 1998. Once the project comes to fruition, it is expected that gas use in China will rise from the current 2 percent to 10 percent. (TGP)

BUSINESS ALERT
CENTRAL ASIA SMALL-ENTERPRISE FUND ESTABLISHED (5 July)
The U.S. Agency for International Development, the International Finance Corporation, and the Swiss government jointly established an $8.6 million fund to promote small and medium-sized business growth in Central Asia, AP reported on 5 July. The SEAF Central Asia Small Enterprise Fund, which was launched on 5 July, will provide direct equity to small and medium-sized businesses as well as help develop management practices for new enterprises. According to the fund's director, Donald Nickolson, "We will coach, tutor, nurse businesses for prosperity and growth." The fund will initially invest in enterprises worth $350,000 to $400,000 and employing 10 to 100 workers, AP reported. (TGP)

RUSSIAN-U.S. POULTRY DISPUTE CONTINUES (8 July)
A U.S. Embassy spokesperson announced on 8 July that the United States and Russia have failed to finalize a document required by Russia to admit U.S. poultry products, Reuters reported the same day. U.S. exporters have decided to suspend poultry shipments to Russia until a mutually acceptable veterinary certificate has been agreed. According to Albert Davleyev, head of the U.S. Poultry and Egg Export Council (USAPEEC) in Moscow, "No one is currently loading new ships. Everybody is waiting for an agreement on the new certificate," Reuters reported. Moscow said it will refuse U.S. imports that are not accompanied by the appropriate certificate from 1 August. A spokesperson for the U.S. delegation sent to Russia to negotiate the terms of the new certificate told Reuters: "The talks between the U.S. delegation and the Russian counterparts were very productive. We made considerable progress on developing a mutually acceptable poultry export certificate.... But there still are some issues to clarify that require additional information from our side and we are working to resolve these issues. Our delegation is going back to the United States tomorrow [9 July]." In addition to requiring new veterinary certificates on imported U.S. poultry, Russia also intends to raise poultry import tariffs by 25 to 30 percent. The new conditions have the potential to harm the U.S. poultry industry, since Russia provides the industry's largest market. In 2001, Russia imported $640 million in U.S. poultry products. According to Davleyev, U.S. exports from January to July were expected to total 400,000 tonnes -- 40 percent less than the same period in 2001. Russian consumers will also be negatively affected. Davleyev said, "Any restrictions of the poultry market, including higher tariffs, will inevitably lead to an increase in prices of the cheapest meat product in Russia," Reuters reported on 8 July. (TGP)

DIRECT TRAIN FROM PAVELETSKII TRAIN STATION TO DOMODEDOVO AIRPORT (9 July)
Moscow Railways press service announced on 9 July that a new line from Paveletskii Train Station to the Domodedovo Airport will open on 1 August. The project was realized by the Moscow Railways and the companies of the East Line Group. Moscow Railways Deputy Chairman the Sergei Kozyrev said that the company has spent approximately 500 million rubles ($15.8 million) on the railway. According to RosBusiness Consulting, the Red Hall at Paveletskii will be dedicated to airport-customer service and reconstruction work will be finished by 20 July. Moscow Railways reported that the Red Hall will be the departure point for Domodedovo Airport passengers. The trip between destinations will take approximately 40 minutes and trains will leave every hour. The booking and registration offices for the airport passengers also will be in the Red Hall. RosBusiness Consulting reported that the 50 ruble ($1.58) cost of the train ride will be included in the price of a plane ticket. One of the best features of the Red Hall service is that passengers will be able to leave their luggage in the Paveletskii station and retrieve it at their final destination. (IAM)

RUSSIAN BUSINESS ABROAD
GAZPROM SEEKS 34 PERCENT OF LIETUVOS DUJOS (10 July)
Gazprom will participate in a privatization tender to acquire 34 percent of the Lithuanian company Lietuvos Dujos. Gazprom's press service said it intends to conform to the criteria set forth in privatization documents. According to AKM.ru on 10 July, under the terms of the deal, the investor must guarantee for 10 years the delivery of natural gas "at generally acceptable prices," supplying Lithuania with 70 percent of its natural-gas requirements. According to the tender, Lithuania's consent is required prior to the sale of any acquired stock. RosBusiness Consulting reported on 10 July that submissions for the tender must be received by the 15-16 July deadline and initial tender proposals should be submitted by 10-11 September. The final proposals will be submitted on 11-12 November. The Russian government will retain a 24.36 percent stake in the Lithuanian gas company, while private investors will maintain a 68 percent share. In the first stage of the privatization, Gazprom's German partner, Ruhrgas, and E.ON Energie acquired 34 percent of Lietuvos Dujes shares for $33.8 million, according to the RosBusiness report. (PMJ)

WHO IS IN? WHO IS OUT?
NEW GAZPROM BOARD MEMBERS ANNOUNCED (10 July)
Gazprom announced that two new members have been elected to its board of directors, according to AKM.ru 10 July. Boris Yurlov was appointed Gazprom deputy board member, and Andrei Kruglov was appointed head of the Corporate Financing Department. The new officials replaced Vitalii Saveliev and Aleksandr Semenyaka, respectively. (PMJ)

ROSSPIRTPROM TAKES CONTROL OF MOSCOW KRISTALL BOARD (8 July)
An election for the Moscow Kristall board of directors was held on 1 July. Russian Rosspirtprom received five of nine seats on the board. Rosspirtprom representatives on the Moscow Kristall board include: Yakov Mastinskii, Sergei Makarov, Viktor Samoilov, Marina Ivanova, and Aleksandr Bezuglov. Rosspirtprom holds a majority stake and managerial control of Kristall. According to AKK.ru, the minority stockholder representatives, including Kristall-Lefortovo Finance Director Sergei Nikonov, Orion Engineering General Director Oleg Khakhaev, and RSP-Consulting Lawyers Taras Marchenko and Oleg Lebedev, occupy the four remaining seats. (IAM)

WHAT'S UP? WHAT'S DOWN?
RUSSIAN OIL EXPORTS INCREASE (11 July)
Russian State Customs reported on 11 July that the volume of oil exports from Russia increased by 15.4 percent in the first five months of 2002. The volume of oil registered during the same period was 73.6 million tons, RosBusiness Consulting reported. Up to 59.25 million tons were exported outside of the Commonwealth of Independent States (CIS). This volume amounted to $8.64 billion and showed a 6.2 percent increase compared to the first five months of 2001. As for the CIS countries, Russian oil exports reached 14.3 million tones, totaling $1.12 billion in the first five months of 2002. This was a 79.1 percent increase compared to January to May of 2001. Oil supplies increased by 5.2 percent compared to the first five months of 2001. The value of the supplies reached $9.76 billion. (IAM)

PROFILE
SERGEI BOGDANCHIKOV: THE BATTLE FOR SLAVNEFT (Part 3)
The candidacy of former Sibneft executive Yurii Sukhanov for the presidency of Slavneft was opposed by a number of diverse interests. Rosneft's Sergei Bogdanchikov was among Sukhanov's opponents. Bogdanchikov reportedly sided with Sergei Pugachev and Mezhprombank (MBP) in an attempt to deprive Roman Abramovich, one of the oligarchical giants of the Yeltsin era, of the opportunity to obtain one of the remaining jewels of the Russian state energy establishment and promote his vision for a consolidated Russian energy giant Gosneft (see "Profile, "RFE/RL Business Watch," 9 July 2002). Pugachev's allies in the so-called "chekist" faction from St. Petersburg lined up to support their candidate. Supporters allegedly included Federal Security Service (FSB) chief Nikolai Patrushev and ex-FSB officers working in the Kremlin apparatus. This battle also extended to the Belarus capital, Minsk, where sides were taken and feathers ruffled.

During the second week of June, one of the key elements of the ongoing battle for control of Slavneft's management was eliminated. According to an Interfax report on 11 July "the Russian Interior Ministry's Investigative Committee has halted criminal proceedings against Slavneft President Yurii Sukhanov and company Vice President Dmitrii Perevalov" due to lack of evidence.

The battle for Slavneft pits Rosneft and its allies against Abramovich and his "family" cohorts, including Prime Minister Mikhail Kasyanov. The focal point of the current struggle has been who will become Slavneft president. Mikhail Gutseriev was removed as Slavneft president in the spring, reportedly on orders from Prime Minister Kasyanov. The Yeltsin "family" faction backed Sukhanov as his replacement, while the rival MPB/Rosneft/"chekist" group favored Anatolii Baranovksii, a Rosneft executive. At stake is control over the company's management and the upcoming proposed sale of 20 percent of Slavneft this fall. Most Russian observers believe that the faction controlling the executive will have the upper hand in the auction. Some media sources have speculated that Gutseriev's removal was jointly orchestrated by both "clans" in the hope of facilitating an insider deal on the sale (see http://www.politcom.ru, 1 July 2002).

There are a number of articles in the Russian press that review these issues concerning the Slavneft affair (see "Vedomosti," 15 May 2002; "Kommersant" and gazeta.ru, 14 May 2002; and "Versiya v Pitere," 29 April 2002).

Bogdanchikov has thus far avoided any obvious involvement in clan wars and overt intrigues. He has attempted to build his company and reputation as a skilled manager who is interested in promoting the interests of the state. Slavneft and its future was too important to Bogdanchikov's vision of the amalgamated Gosneft for him to stay on the sidelines of this battle. His involvement in the affair was risky, but it was a chance he apparently decided to take. The dropping of charges against Sukhanov is an indication that initial victory has been won by the team of Prime Minister Kasyanov and Abramovich. While each side has reportedly used its influence in the Kremlin, the government, the courts, and law-enforcement agencies to tip the scales in its favor, the result appears have been unexpected. The struggle appears to have sidelined the Russian president, even though he has been linked more closely to the "chekist" clan from his native St. Petersburg.

Two court rulings designed to stop Sukhanov from assuming the Slavneft presidency came from Ufa courts, a region where the MPB/Rosneft/"chekist" faction has political influence (Interfax, 17 May 2002; "Izvestiya," 15 May 2002; and "Kommersant," 14 May 2002). Meanwhile, Kasyanov pushed through Sukhanov's election as Slavneft president at a 13 May shareholders meeting ("Izvestiya," 15 May 2002 and "Kommersant," 14 May 2002). Rivals of the "family" then resorted to a crude show of force. During the May Putin-Bush summit meeting, armed law-enforcement personnel forced themselves into the Slavneft president's office in what proved to be a vain attempt to install Baranovskii, who did not recognize the legality of Sukhanov's election ("Nezavisimaya gazeta," 27 May 2002). At the same time, the Interior Ministry (MVD), headed by purported "chekist" ally Boris Gryzlov, reportedly launched a Kremlin investigation of Sukhanov for an alleged Slavneft "transfer-pricing" scheme involving Abramovich's Sibneft company (RenTV, 16 May 2002; "Novaya gazeta," 29 April 2002).

The battle over Slavneft prompted a flurry of commentary in the Russian media on the renewal of the "oligarch wars" (see, for instance, "Vedomosti," 15 May 2002 and politcom.ru, 14 May 2002). Commentators noted that the combatants had resorted to every legal and extralegal tool available to them to seize control of a nominally state-owned company. Some concluded that Bogdanchikov, Pugachev, and the "chekists" were planning to seize control of Slavneft in order to revive the Gosneft idea -- a plan that could severely check the economic power and political influence of their rivals ("Izvestiya," 14 May 2002 and apn.ru, 5 April 2002). Others speculate that this fight is one motivated by the private interests of a few who hope to become enriched while wrapping themselves in the flag of a strong state.

On 1 July, the NTV program "Segodnya" broadcast a story by correspondent Vladimir Kondratyev that Slavneft First Vice President Alla Baranovskaya had embezzled $600 million and distributed the funds between Abramovich, Valentin Yumashev, and Oleg Deripaska. Deripaska filed charges of libel against NTV and Kondraktyev, citing the "contract" character of the story (see "Nezavisimaya gazeta," 4 July 2002). The story's placement clearly supported the efforts of Bogdanchikov and the "chekist" Pugachev faction against the interests of the "family" and Abramovich. But it was not enough to tip the scales in their favor.

Politcom.ru on 11 July linked Sukhanov with an "Interior Ministry man," later identified as First Deputy Interior Minister Nikolai Bobrovskii (see gazeta.ru, 2 July 2002). Putin wasted no time taking advantage of this allegation. Following the allegation, "Izvestiya" reported on 3 July that Putin announced Bobrovskii's resignation on 30 June and appointed him "to another duty," thus far unidentified. "Izvestiya" reported on 4 July that this was part of the effort to purge the MVD of ex-Minister Vladimir Rushailo's appointees. Putin used this vacancy to appoint another Federal Security Service (FSB) general, Rashid Nurgaliev, to Bobrovskii's position in the MVD. NagAliyev and fellow MVD deputy Yevgenii Solovyev are described in the "Izvestiya" article as part of the "Patrushev-Zaostrovtsev team," referring to the director and deputy director of the FSB, respectively.

The dropping of charges against Sukhanov appears to have awarded, at least temporarily, the advantage to the "family" clan verses the "chekist" clan. However, the fight for Slavneft is far from over. The proposed 20 percent Slavneft sale in the fall will surely keep the fight simmering. "Argumenty i fakty" on 9 July published an article that predicted future moves in this struggle with the title, "Oil Scandal: R. Abramovich's Success. Power-Wielding Structures To Make Their Move In Autumn." The article concludes that "the victory may turn out to be only temporary.... In any case, rumors have it that by autumn an information war against the still active entourage of the first president of Russia will be launched. There are indications that an absolutely unexpected figure without any links to any oligarch...may be put at the head of Slavneft."

Even if this is the case, Sergei Bogdanchikov will no doubt be nearby, offering his expertise and promoting his vision for the super Russian state oil conglomerate, Gosneft. Until then, the Slavneft battle, with all its interconnectivity to the rival clans seeking power and influence in the Kremlin, is little more than a battlefield in a much larger and significant war for the remaining economic gems of the Russian state (see gazeta.ru, 2 July 2002). (PMJ)

IN FOCUS
SECOND BLUE STREAM GAS PIPELINE COMPLETED (5 July)
A second gas pipeline connecting Russia and Turkey has been completed, RosBusiness Consulting reported on 5 July. The line was constructed as part of the Blue Stream project linking Russia's Beregovaya compressor station near the city of Dzhubga to Turkey's Samsun station. Construction of the second line began in February, just prior to the first line's completion on 31 March. Both pipelines are 61 centimeters in diameter and laid 2,150 meters below the surface of the Black Sea. The first pipeline has already undergone testing to ensure proper functioning. The second pipeline is expected to undergo similar testing between September and December. According to diplomatic sources in Turkey, the Italian ship responsible for laying the pipeline passed through the Bosporus at the end of June, completing the Blue Stream project.

Russia hopes to deliver gas supplies to Turkey in the last quarter of 2002. This will depend, however, on Gazprom's ability to negotiate remaining tariff and tax issues. Turkey is currently under tight fiscal control by international financial institutions, which will most likely complicate the negotiation process and could prevent gas deliveries in the near term. The multibillion-dollar project hopes to capture the Turkish market. "Gazprom and Eni are competing with Azerbaijan and Iran for gas supplies to Turkey whose fuel requirements jumped by 43 percent between the years 1998 and 2000," according to neftegaz.ru. Rosbalt.ru reported on 8 July that "the 800 kilometer-long undersea portion of the $3.3 billion pipeline to Turkey expects to begin pumping in October of 2002."

According to a 1997 Russia-Turkey intergovernmental agreement, Russia is to deliver 360 billion cubic meters (bcm) of gas to Turkey over the 25-year period between 2000 and 2025 (see "RFE/RL Business Watch," 29 May 2001). Russia continues to promote its goal of becoming Turkey's primary gas supplier. Turkey's gas demand was expected to more than double and reach 45 bcm by 2006, but this amount may, in fact, be reduced due to the current Turkish economic crisis. Gazprom exports up to 16 bcm of gas to Turkey annually. The ultimate capacity of 16 bcm per year will eventually be supplied by two 8 bcm pipelines. Stroitransgaz, a subsidiary of Gazprom, is responsible for the overall pipeline and gas-delivery project.

On 12 May 1999, Intercon's "Daily Report on Russia" reported that Gazprom and the Italian gas-oil group ENI formed a 50-50 joint venture called Trustco to build, own, and operate the undersea section. Both companies invested $200 million in Trustco, in addition to the $800 million loan from Italian banks Banca Commerciale Italiana and Mediocredito Centrale, as well as Germany's Westdeutsche Landesbank. On 24 November 1999, Intercon reported that a $1.7 billion contract to build the offshore sections of the Blue Stream pipeline was signed. The joint venture, Blue Stream Pipeline Company, contracted Italian-based Saipem SpA, French-owned Bouygues Offshore, and a Japanese consortium comprising Mitsui Co. Ltd., Sumitomo Corp., and Itochu Corp. to design, engineer, and construct two threads of an underwater section of the pipeline as well as a compressor station on the Black Sea coast. Mitsui, Sumitomo, and Itochu supplied $500 million worth of piping. Intercon reported on 28 February 2001 that Gazprom borrowed 250 million euros ($231 million) from European banks, led by HypoVereinsbank, to finance the project. Banks which participated in the loan included Germany's second-largest bank; Credit Agricole, France's second-biggest bank; and Westdeutsche Landesbank Girozentrale, Germany's largest state-owned bank (see "RFE/RL Business Watch," 29 May 2001).

The continuing Turkish economic crisis has made investors in the $2-billion-plus project look increasingly to Europe. The Gazprom/Eni alliance hopes to use Turkey as a transit state for moving additional gas supplies through a connecting pipeline to Greece and other European countries. Rosbalt.ru reported that "the two partners have been granted $1.76 billion in loans to pay for the completion of the project by the SACE, an Italian export/import agency, and Japan's MITI [Ministry of International Trade and Industry] and the JMIC [Japan Bank for International Cooperation]."

Other pipelines originating in the Caspian Sea region are still years from realization, and thus the success of the Blue Stream multiple pipeline project may have implications not only for the Baku-Tbilisi-Erurum (BTE) gas pipeline, but also for the Baku-Tbilisi-Ceyhan (BTC) pipeline. BTC investing companies need to sell their significant gas resources in order to make the overall BTC oil-pipeline project more attractive financially. (PMJ/TGP)

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