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Business Watch: July 23, 2002


23 July 2002, Volume 2, Number 29
OIL & GAS
BTS WILL BE COMPLETED IN SUMMER 2005 (18 July)
According to experts, the major benefit of the Baltic Pipeline System (BTS) is that it will considerably reduce the costs of Russian oil transport through the Baltic states. The BTS project has been divided into phases. The first stage, BTS-1, included the renovation of the Yaroslavl-Kirishi pipeline, the construction of a new Kirishi-Primorsk pipeline, and the completion of a new oil terminal in Primorsk. A Russian pipeline-construction company, Baltneftprovod, organized the project. According to "The St. Petersburg Times" on 16 July, completion of the first phase cost up to $460.2 million. An upcoming second stage will include two phases. First, a pipe-cleaning system will be installed along the 258-kilometer long pipe. Second, three oil-pumping stations will be installed in the Tver and Novgorod oblasts and in Sestroretsk (North of St. Petersburg). According to Baltneftprovod General Director Viktor Aleksandrov, BTS-2 will permit the shipment of an extra 6 million tons of oil, which will total 18 million tons per year. Aleksandrov announced that Baltneftprovod, together with Russian Alfa Bank, will invest $334 million in BTS-2, "The St. Petersburg Times" reported. According to Aleksandrov, BTS-3 will be the most important part of the entire BTS project and will "...require several times more investment, but it will raise the total shipping capacity to 30 million tons per year." Aleksandrov also said that the pipeline construction would be ready in summer of 2005. (IAM)

RUSSIA COULD HAVE PETROLEUM DEFICIT IN 2010 (18 July)
Russian Deputy Minister for Natural Resources Peter Sadovnic fears that Russia will become a net petroleum importer by 2010 if some negative trends are not addressed. Sadovnic discussed this at a press conference held on 18 July at his ministry, according to Rosbalt.ru. Sadovnic's forecast, however, assumes that production will continue at the current level without developing any new oil fields. According to Sadovnic, western Siberian, eastern Siberian, and the Far Eastern petroleum and gas regions could potentially yield 15 million tons of petroleum, and that new underwater oil fields could potentially yield 30 million tons per year, Rosbalt.ru reported. Increased oil and gas exploration will be necessary to avert a negative trend. (PMJ)

CUSTOMS DUTY ON CRUDE OIL PRODUCTS WILL INCREASE (17 July)
Russian Prime Minister Mikhail Kasyanov signed a statement on 12 July concerning the increase of export customs duties on crude oil and oil products obtained from bituminous rock, SKRIN "Issuer" reported. The regulation will become active on 1 August. The duty on one ton of oil will rise to $21.9. (IAM)

BUSINESS ALERT
VIMPELCOM AWARDED ST. PETERSBURG FREQUENCIES (15 July)
On 15 July, Gossvyaznadzor, the regulatory branch of the Russian Communications Ministry, approved an application by the country's second-largest mobile phone operator, Vimpelcom, to service St. Petersburg, Reuters reported on 17 July. Gossvyaznadzor provided Vimpelcom with frequencies and authorized their use. According to a Communications Ministry spokesperson, the decision will allow Vimpelcom to apply for the rights to operate a GSM-1800 network in Russia's second-largest mobile phone market. An unnamed source cited by "Vedomosti" on 17 July claimed that Vimpelcom had already filed the application. Vimpelcom refused to comment on the issue, Reuters reported. Vimpelcom had earlier said that it applied for the St. Petersburg license in 1999, but Communications Minister Leonid Reiman announced in June 2002 that the previous application was incomplete. Reiman has said that Vimpelcom is likely to win a license once the appropriate paperwork has been filed. Even if Vimpelcom is awarded the license, it remains unclear as to whether the venture will be profitable. Mobile TeleSystems and MegaFon are already operating in the St. Petersburg market. Vimpelcom's entry would provide the city with three GSM operators and five mobile-phone carriers, Reuters reported. (TGP)

ARMENTEL EXPANDS MOBILE SERVICE IN ARMENIA (12 July)
Armentel, a subsidiary of Greek OTE that operates all telephone service in Armenia, will invest an additional $24.4 million in the Armenian mobile-phone market, ArmenPress news agency reported on 12 July. Armentel's board of directors approved an initial investment of $15 million at the beginning of 2002. The funds will be used to expand existing networks and update mobile-phone services. Once the new system is in place, Armentel expects to serve 200,000 customers and be accessible from 85 percent of the country's territory. (TGP)

RUSSIA WILL SOON HAVE 1.5 MILLION SMALL BUSINESSES (16 July)
Russian Labor and Social Development Minister Aleksandr Pochinok announced on 16 July that approximately 1.5 million small businesses will emerge in Russia during the next few years. Pochinok made this announcement at a meeting organized by the Coordination Council of Russian Employers on "Decent Job[s] in the Global World." RosBusinessConsulting quoted Pochinok as saying that the Russian government "is turning slowly" to the development of small businesses. According to the minister there are currently about six times fewer small businesses in Russia than should be the case. Pochinok said that the Russian government supports the creation of conditions needed for the development of small enterprises. (IAM)

SUKHOI WILL RAISE ITS SHARE IN THE AVIATION MARKET (16 July)
The general director of the aircraft company Sukhoi Aviation Military Production Corporation, Mikhail Pogosian, said that his company plans to increase its share in the aviation market by up to 20 percent. Currently, it controls about 14 to 15 percent of the aviation market. RosBusinessConsulting quoted Poposian as saying that the budget of the Sukhoi Aviation Corporation is approximately $1 billion a year and is likely to double in the near term. According to Pogosian, the company has the funding required to expand military production and civil aircraft manufacturing. Sukhoi Aviation Corporation has started negotiations with various aircraft companies to improve military production. The company is focusing on SU-30 aircraft, as well as on the SU-49, SU-271B, and an airplane that will be developed as a joint project with both Boeing and the Ilyushin Aviation Corporation. Pogosian said that the Sukhoi, Ilyushin, Tupolev, and Yakovlev aircraft companies will merge, but did not provide any details. He called the merger "unavoidable." (IAM)

RUSSIAN BUSINESS ABROAD
RUSSIA LOSES $350 BILLION TO FOREIGN BANKS AND PRIVATE CITIZENS (11 July)
Russia's Chamber of Commerce and Industry President Yevgenii Primakov announced at a meeting with a delegation from the German state of Bavaria on 11 July that up to $300 billion had been removed from Russia and invested in foreign banks. According to Primakov, an additional $50 billion remains in private piggybanks owned by Russian citizens, since much of the population does not trust Russian banks. Bavarian Minister of Economy, Transportation, and Technology Otto Wiesheu said that about 700 Bavarian companies have investments in Russia, Rosbalt news agency reported. According to Rosbalt, trade turnover between Russia and Bavaria increased by approximately $2.8 billion -- from $1.9 billion in 1999 to $4.7 billion in 2001. (IAM)

ECONOMIC NEWS & BUSINESS STATISTICS
ALFA BANK TO PURCHASE 28 SMALLER BANKS (9 July)
Russian Alfa Bank President Peter Aven announced that as the bank expands nationwide it plans to purchase 28 regional banks. "The Moscow Times," quoting "Vedomosti" on 9 July, reported Aven as saying, "We were buying regional banks in the past as well, but now we regard this strategy to be more sensible [than creating branches]." According to Alfa Bank's first deputy director, Yevgenii Bernshtam, the majority of those 28 banks are located in Siberia, the Urals, and cities in the Far East. As for Russian cities, the bank will choose industrially developed city banks along with small-town banks. According to Bernshtam, Alfa Bank plans to double its share of the local market after purchasing the regional banks. "When buying a bank, our choice will be dictated by its regional network and market share," Bernshtam said. Alfa Bank will continue to create new branches, "But we are very cautious about buying banks because this way we are not insured against obligations that turn up after a year...caused by the departure of client managers that may not agree with the tough conditions established in the Alfa Bank system," Bernshtam said. According to a Rating Research Center analyst, Alfa Bank's change in strategy has been caused by drastic changes on the banking market. If years ago it was difficult to buy a bank, "...Now the banks have less instruments to earn money and the majority of small banks are on the brink of bankruptcy...Many bank owners who didn't even think about selling them...[now] are looking for buyers everywhere," said the analyst. He also said that Alfa Bank can avoid the aforementioned problems "by switching the business of a purchased bank to Alfa Bank and then selling the bank's license," "The Moscow Times" reported. Statistics show that people are currently trying to sell banks. In previous years banks were being sought for purchase. "The Moscow Times" reported that Alfa Bank will save time by purchasing banks that already have clients and established business relationships. According to the director of the Analytical Department at Rosbank, Valerii Petrov, even though Alfa Bank will win some time by purchasing established banks, it is easier to start a bank from scratch. He said, "It is much more manageable because the decision-making system is imposed immediately in the network." (IAM)

RUSSIA HAS 8.2 PERCENT UNEMPLOYMENT (16 July)
The Russian State Statistics Committee announced on 16 July an 8.2 percent unemployment rate for the month of June. According to RosBusinessConsulting, 5.9 million working-age citizens were without jobs and were seeking employment. The unemployment percentage has remained almost the same since May. The working-age population was 72.5 million at the end of June. This number is almost half of the entire country's population. A large number of Russia's working-age population was employed in large and medium-sized enterprises. In May, large and medium-sized enterprises employed about 40.8 million working-age citizens, which is 61.8 percent of the total number of Russian employees. (IAM)

WHO IS IN? WHO IS OUT?
NEW SIDANKO PRESIDENT NAMED (17 July)
SIDANKO, a Russian joint venture oil company, announced on 17 July that Lawrence Smith will replace President Robert Sheppard, AK&M.ru reported. Sheppard will continue as a member of the company's board of directors. The new president was previously the president of British Petroleum-Columbia. He held the position for four years and will assume the SIDANKO post on 1 September. BP holds a 25 percent share in SIBANKO with the Alpha Group and 56 percent in Access/Renova.

A U.S. Department of Energy (DOE) report dated April 2002 and titled "Russia: Energy Sector Restructuring," described how SIDANKO's high profile "1999 bankruptcy proceedings...caused many Western investors to shy away from investing in Russia's oil sector." However, after much turbulence, the DOE report concludes, "BP decided to purchase an additional 15 percent of SIDANKO from TNK (in April 2002). The deal drew to a close one of the more controversial cases of corporate governance in Russia" (see also "RFE/RL Business Watch," 12 February 2002, "BP IN EARLY TALKS FOR TNK STAKE"). (PMJ)

WHAT'S UP? WHAT'S DOWN?
RUSSIAN PIPE MANUFACTURING REDUCED (16 July)
The Russian State Statistics Committee announced that steel-pipe production had decreased by 8.4 percent in the first three months of 2002 to reach 2.43 million tons. According to RosBusinessConsulting, approximately 406,000 tons of piping was produced in June, which is an 11.3 percent decrease compared to June 2001. Statistics also showed a 4.2 percent decrease in the production of seamless pipes. The volume of seamless pipes produced in the first quarter of 2002 was 1.14 million tons. Approximately 198,000 tons out of 1.14 million were produced in June 2002, which was a 0.6 percent decrease compared to June of last year and a 3.2 percent decrease compared to May 2002. Welded pipe production was reduced by 5.4 percent and amounted to 47,000 tons. Up to 9,500 tons out of 47,000 were manufactured in June of 2002, which showed a 21.5 percent decrease compared to corresponding figures for June 2001. The figures also showed a 4.8 percent decrease compared to the data for May 2002. RosBusinessConsulting reported on 16 July that the manufacturing of pipes with electrical weld was reduced by 12 percent and amounted to 1.24 million tons. Approximately 198,000 tons out of the 1.24 million tons were manufactured in June 2002, which is a 19.5 percent decrease compared to June 2001 and a 1.5 percent decrease compared to May 2002. (IAM)

INDUSTRIAL PRODUCTION SHOWS GROWTH IN RUSSIA (16 July)
Seija Lainela, the editor in chief of the Russian-European Center for Economic Policy's (RECEP) monthly brochure "Russian Economic Trends," announced on 16 July that RECEP estimated that the industrial production in Russia will increase by 3.6 percent in 2002. According to Lainela, economic growth has improved in recent years. In June 2002, growth increased 4.4 percent compared to the same period in 2001. RosBusinessConsulting quoted Lainela as saying that RECEP and the Russian government had similar estimates of the country's industrial production growth for 2002. According to RosBusinessConsulting, constructive foreign economic circumstances, including high oil prices, had a major impact on economic growth over the last several months. A second important growth factor was investment intensification over the last three months. Foreign investment increased by 1.7 percent in May as opposed to the same period in 2001. According to Lainela, the euro exchange-rate increase will not "...have a significant impact on the economy of Russia." Lainela believes that euro-rate improvements could lead to the increase of Russian exports to EU countries. (IAM)

COSTS OF CONSTRUCTION ON THE RISE (15 July)
Aleksandr Martynov, advisor to the Shtern-Cement company in Russia, told RosBusinessConsulting on 15 July that production of construction materials may cease without state support of domestic manufacturers. Martynov said that the Russian government could help producers by offering tax breaks or discounting electricity fees. According to Martynov, cement, which is the mainstay of the construction industry, is becoming increasingly unprofitable. He said, "There is a decline in investments, and the tariffs on electrical power and fuel are rising faster than the price of cement," RosBusinessConsulting reported. Railway tariffs have also contributed to the cost of cement production. (TGP)

EURO RATE RISE WILL INCREASE DEBT PAYMENTS FOR RUSSIAN GOVERNMENT (16 July)
Russian Finance Minister Aleksei Kudrin announced on 16 July that due to changes in the dollar/euro rate Russia has budgeted additional 2002 money reserves in order to meet increased payments on the country's foreign debt. Kudrin said that the Russian 2002 budget was calculated according to the 0.98 dollar/euro rate, RosBusinessConsulting reported. According to Kudrin, a $1/euro rate will cause an increase of the Russian foreign debt by $350 to $400 million. RosBusinessConsulting quoted Kudrin as saying, "We budgeted this reserve from the very beginning. We won't go beyond the budgeted amount of foreign debt payments even in this tough situation." According to the minister, the euro rate increase against the dollar has slowed the ruble's growth. Kudrin announced, "no ruble strengthening against the world currencies has been seen in the first half of 2002." (IAM)

PROFILE
GIORGI CHANTURIA: POLITICAL DIPLOMAT AND WESTERN-STYLE EXECUTIVE (19 July)
"Georgia is Becoming a Transit Country" proclaimed the headlines of the rosbalt.ru website on 23 June. Indeed, much activity is under way in Georgia to increase the transit of oil, gas, and goods across the gateway country of the South Caucasus to the Black Sea. Giorgi Chanturia, president of the Georgia International Oil Corporation, has greatly contributed to the creation of this reality. Chanturia, known as a political mover and shaker, is not an oilman by profession. As a former Komsomol leader from Tbilisi, ambassador to Azerbaijan, and now state business executive, Chanturia has worked hard to promote a vision of Georgia as a reliable transit country for the vast energy reserves of the Caspian Basin. "The Georgian Times" recently identified him as the second-most-successful executive of a Georgian state-controlled company. His name has repeatedly been mentioned as one of the top candidates for high government posts in Georgia.

From his early experience in Komsomol, Chanturia has been identified as a talented, up-and-coming leader. Not long after his return to Georgia in 1992, President Eduard Shevardnadze envisioned a Eurasian corridor that would link the Central Asian space with Europe. In a speech delivered in Kyiv in spring 1993, Shevardnadze publicly announced his corridor idea. He viewed Georgia as the linchpin of the corridor, providing a gateway on the Black Sea for goods to move back and forth from Central Asia to Europe. The success of the corridor through the South Caucasus would link the fates of Georgia and Azerbaijan to one another. Imperative to this vision would be the establishment of friendly and mutually supportive relationships between energy-rich Azerbaijan and Georgia. Shevardnadze turned to Chanturia for this crucially important assignment.

In 1993, Chanturia was appointed as Shevardnadze's personal adviser for the development of the East-West Energy Corridor and Transport Systems. He served in this formative capacity until 1995. Shevardnadze's vision held that the independence of Georgia required the development of a reliable transportation system to export Georgia's agricultural bounty to markets and provide a secure transportation corridor for those countries wishing to connect with the Western world. The first marquee project was to lobby a two-pipeline approach for the Caspian "early oil" project. Georgia was in the throws of civil conflict and the aftermath of the civil war in Abkhazia. The presence of a multinational-supported pipeline would greatly enhance Western political attention to support the Shevardnadze government. It would also eventually produce much-needed energy transit fees as it traversed Georgia from the Caspian energy deposits. The success of the Baku-Supsa (a Georgian port on the Black Sea near Poti) pipeline provided an important measure of global political support that would be crucial for Georgia's survival. Chanturia was the key action officer of this effort. He became actively involved in promoting Shevardnadze's vision through international trips and contacts in the West and by cultivating support in the Azerbaijan capital of Baku.

Shevardnadze appointed Chanturia as Georgia's ambassador to Azerbaijan in 1995. During this time he promoted the Baku-Supsa pipeline and Shevardnadze's vision of the Eurasia corridor. Shevardnadze established the Georgian International Oil Company (GIOC) with special decree number 477 on 11 November 1995. He then appointed Chanturia, still serving as ambassador, to be the president of GIOC and extraordinary commissioner. In February 1996, the GIOC was registered as a joint-stock company, according to the company documents. GIOC has continued to receive from the U.S. Agency for International Development (USAID), the British Know-How Fund, the United Nations Development Program (UNDP), and EU assistance to provide advice on the establishment of a credible transportation system in Georgia. With this international assistance, GIOC became one of -- if not the first -- local Western-styled company in Georgia operating transparently and professionally with companies and governments both in and outside of Georgia. Chanturia's success at promoting and overseeing the construction and operation of the early oil pipeline between Baku and Supsa, which opened in April 1999, have won him the respect of many. He has become one of the longest-standing executives within the Georgian government and remains a trusted ally of Shevardnadze in building Georgia as a key transit country along the East-West Eurasian corridor. (PMJ)

NEXT WEEK: Chanturia's Diplomatic Overtures, Abkhazia, And Russia

IN FOCUS
ITERA THREATENS TO STOP SUPPLYING GAS TO GEORGIA (9 July)
Georgia is not presently receiving gas from Russia, according to RosBusinessConsulting (RBC). "All gas supplies have been canceled on June 26 due to Tbilgaz's indebtedness to Sakgaz -- Itera's subsidiary," RBC reported on 5 July. In an interview with the newspaper "Resonance" on 4 July, the general director of Tbilgaz, Vakhtang Tsaava, stated, "The money is paid, but still there is no gas." In fact, only 1.55 million lari ($750,000) were transferred to the Itera subsidiary prior to Georgian State Minister Avtandil Dzhorbenadze's departure for Moscow on 5 July. Georgia owed an additional $75,000 to Itera and the Moscow gas provider refused to re-establish gas supplies to Tbilisi until the amount was paid in full. "The director-general of Sakgaz thinks that despite the pressure they are ready to consider constructive proposals to search for the ways out of the established situation," according to "Resonance."

According to Tsaava, Sakgaz officials further complicated the situation by establishing a new requirement, in addition to demanding payment on the current debt. RBC reported on 5 July that gas supplies would resume only after Georgia paid the remaining $75,000 and restructured its debt with Itera.

Georgian State Minister Dzhorbenadze held talks in Moscow on 5 July to restructure Georgia's debt to Itera. According to Itera, Georgia owes $90 million for previously supplied gas. Tbilgaz, which supplies gas to the capital of Tbilisi, owes $10.9 million to Itera, according to the Black Sea Press news agency. Television station Rustavi-2 reported on 8 July that the state minister would raise the payment issue with the Tbilisi mayor's office and Tbilgaz officials and punish them if the stalemate continues.

Tbilisi faces additional gas infrastructure problems. The chairman of Tbilgaz JSC, Jemal Bukiashvili, testified before a parliamentary commission on 9 July that it would be impossible to supply natural gas to 30 percent of the population due to the poor condition of the capital's main gas-distribution line, according to Prime News Agency. Bukiashvili criticized the Ministry of Fuel and Energy for failing to correct the problem. "Renewal of the natural gas supply to the capital would begin gradually...from the Samgori region," Tbilgaz Director-General Tsaava told Prime News Agency.

On 10 July, Itera and Gazprom announced that Itera's $60 million debt to Gazprom would be settled through quarterly installments. According to the Gazprom press service, an agreement was signed between Gazprom CEO Aleskei Miller and Itera Director Igor Makarov on 9 July. According to Interfax on 10 July, the agreement was "aimed at regulating relations, obligations and settlements between the companies."

The combination of internal inefficiency, corruption, and a heavy debt burden make energy-dependant Georgia extremely vulnerable to outside pressure and political turmoil. Georgia faces both ongoing political rivalries leading up to the presidential election and economic instability from an unstable government. In the 12 July issue of "Resonance," Sakgaz demanded a $750,000 payment from Tbilgaz. The local Georgian company transferred funds on 9-10 July paying for all of July and half of August. The gas still has not been fully restored according to a Georgian official in Tbilisi.

But there are differing versions concerning who is to blame for the lack of gas in the capital. Meetings were held at the Tbilisi City Hall on 17 July between representatives of 11 Georgian nongovernmental organizations (NGOs) and Tbilisi Mayor Ivane Zodelava. Citizens demanded the resignation of Tbilgaz Director Tsaava, who has failed to supply gas to the city. The NGOs claimed that Russia started supplying gas around 10 July. Tsaava claimed that parts of the gas network are in disrepair and are to blame for the gas-distribution problems. Others suspect that if the gas was being delivered, it may have been diverted for personal gain. No verification from Itera was obtained concerning the gas deliveries. (PMJ)

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