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Business Watch: July 30, 2002

30 July 2002, Volume 2, Number 30

The next issue of "RFE/RL Business Watch" will appear as soon as we are able to bring it to you. We apologize for any inconvenience that this interruption in the weekly publication schedule causes.
ABB, a Swiss-Swedish engineering group, signed an agreement with Exxon Neftegas Ltd. to supply equipment for an oil and gas plant in the Russian region of Sakhalin, Reuters reported on 22 July. In addition to procuring equipment for the project, ABB will also help design and construct facilities to support three offshore-well sites, Reuters reported. The contract, worth $987 million, will back Sakhalin-1, the largest foreign direct investment project in Russia. In a statement ABB said, "The Sakhalin-1 order is in line with ABB's focus on projects with both higher engineering content and a higher proportion of reimbursable rather than fixed-price contracts." Sakhalin-1 expects to produce oil beginning in 2005, Reuters reported. (TGP)

Representatives from Russia's oil producer Yukos and China's National Petroleum Corporation (CNPC) met on 25 July and agreed that CNPC would loan Yukos up to 50 percent of the total cost of Russia's section of the Russian-Chinese pipeline, Reuters reported. The estimated cost of the pipeline totals $1.7 billion. The pipeline will transport Siberian oil to northeast China and should be completed by 2005. In total, the pipeline will cover some 1,450 kilometers of Russian territory and another 790 kilometers of Chinese territory. The Chinese section will be fully financed by CNPC. Yukos's Russian partner in the pipeline project is Transneft. The Russian-Chinese pipeline capacity will be 20 million tons of oil per year, which is approximately 400,000 barrels per day. During the first five years (2005-10) the pipeline will transfer the above-mentioned amount to China, and from 2010 through 2030 the pipeline capacity will be increased to 30 million tons annually. (IAM)

Russian President Vladimir Putin and French President Jacques Chirac announced on 19 July that Russian airline Aeroflot will purchase 18 Airbus planes, AP reported the same day. Putin and Chirac did not elaborate upon whether or not the $600 million deal would allow Aeroflot to purchase planes from producers other than Airbus. Although Aeroflot is expected to purchase A320 mid-sized passenger planes, Putin also called upon Russian airlines to support domestic airplane manufacturers. Aeroflot previously made an agreement with the government to lease Boeing and Airbus planes tax-free. In return, Aeroflot promised to purchase Russian-made airplanes. Aeroflot defaulted on its promise, arguing that Russian-made planes were too expensive. The Russian government responded by suspending Aeroflot's tax privileges. (TGP)

Russian oil company Rosneft's board of directors announced on 24 July that it would hold an extraordinary meeting of Rosneft general shareholders. The meeting is set to discuss the issue of unifying Rosneft shareholder capital to improve the success of the company's management. The extraordinary general shareholders' meeting will be held before the end of September and will use the principle of absentee voting. According to a decision on unifying capital, Rosneft will convert preferred shares to common shares in 2003, RosBusinessConsulting reported. (IAM)

The Russian State Duma's final decision concerning the placement of Russian Eurobonds on Western markets in 2002 has not yet been made, RosBusinessConsulting reported. In July, the Russian Finance Ministry submitted a proposal to Prime Minister Mikhail Kasyanov about the placement of Russian securities on foreign markets. According to RosBusinessConsulting, Russia is in no hurry to borrow new funds, considering the current "negative environment" on Western markets. Kasyanov has not yet commented on the proposal. In the Finance Ministry's opinion, the Russian federal budget requires up to $2 billion in order to realize the Eurobond project. (IAM)

On 22 July, the Russian Finance Ministry announced a draft foreign-borrowing-program scheme for 2003. The program foresees the drawing of $1.68 billion from foreign financial funds. RosBusinessConsulting quoted the Finance Ministry as saying that it plans to issue $1 billion worth of Eurobonds with 7- to 10-year circulation terms. In addition, the Finance Ministry hopes to attract approximately $640 million in credit from international financial institutions, including banks and companies, as well $40 million in credit from the International Bank for Reconstruction and Development (IBRD). The IBRD credit would help in the establishment of regional financial bodies. According to RosBusinessConsulting, the Finance Ministry's draft bill will be discussed at the 26 July meeting of the State Duma. (IAM)

Russian oil giant Gazprom will submit its budget for 2003 to the Russian State Duma. According to RosBusinessConsulting, the company's budget will be submitted in strict compliance with the 1 August deadline. Gazprom's executive board set a self-imposed deadline of 25 July. At the meeting, a number of alternatives for Gazprom's 2003 budget were discussed and positive steps were taken towards the reduction of the company's costs, reported RosBusinessConsulting. On 1 March, Gazprom's executive board endorsed a deficit-free 2002 budget. (IAM)

The president of Association Russia (Russia's Regional Banks Association Council), Aleksandr Murychev, announced on 25 July that the association plans to create a bureau of credit histories. The bureau will operate within the framework of Interbank's Accounting System. Interbank Accounting System President Igor Kogan believes that "if a database of credit histories is created in the country, the problem of giving credits to small businesses will be solved," RosBusinessConsulting reported. The Russian Economy Ministry is currently working on a new bill concerning credit bureaus. Murychev has proposed that the credit bureau be established prior to the implementation of the final bill. RosBusinessConsulting quoted Murychev as saying that there are up to 60 banks in the Interbank Accounting System and they "trust each other." (IAM)

The financial losses of Russian Railways' long-distance passenger-transportation services could amount to 28 billion rubles (approximately $889 million) in 2002 compared to 8.1 billion rubles (approximately $571 million) in 2001. RosBusinessConsulting reported that transportation losses increase the burden on cargo companies, whose transportation fares will increase by 15 to 20 percent. On 20 July, the management of the Russian Railways Ministry's service for reforming railway transport considered the possibility of providing compensation for passenger transportation losses. According to RosBusinessConsulting, the Railways Ministry submitted a proposal to the Finance Ministry concerning the 2003 federal budget. The proposal suggested that state budget funds be used to compensate passenger-transportation services for losses incurred due to government-regulated long-distance-transportation tariffs. The proposal also complained of revenue losses due to long-distance-transportation benefits provided by federal law. The Railways Ministry is attempting to improve state regulations on rail transport. According to RosBusinessConsulting, the Railways Ministry submitted proposals to the Antimonopoly Ministry, the Economic Development and Trade Ministry, and the Federal Energy Commission. (IAM)

Russian oil giant LUKoil's net profits totaled $243 million from January to July 2002. According to LUKoil's press service on 25 July, this was a significant reduction from the $680 million in net profits achieved in the first six months of 2001. Sales amounted to $2.85 billion in the first half of 2002, as opposed to $3.34 billion during the same period in 2001. According to RosBusinessConsulting, the company's operating expenses fell from $1.07 billion to $1.05 billion in the first six months of 2002, while the total tax volume, excluding profit tax, rose from $275 million to $377 million. LUKoil's operational profits fell from $891 million to $371 million in the first six months of 2002. RosBusinessConsulting reported that LUKoil's pretax profits in 2002 amounted to $317 million compared to $900 million in the corresponding period of 2001. As for the profit tax, it also fell from $240 million in the first half of 2001 to $108 million in the first six months of 2002. (IAM)

Gazprom, Russia's gas giant, reported a 36 percent drop in net profit during the first six months of 2002, Reuters reported on 22 July. Preliminary net profits were down 23.2 billion rubles ($741 million) in the first half of 2002 compared with the same period in 2001. Gazprom has continued to exhibit strong production and blames the decrease in profits on low gas-export prices. According to Valerii Nesterov of Troika Dialog brokerage, "The results are strong and the first-half plunge coincides with negative oil prices at the end of 2001," Reuters reported. According to Gazprom's 22 July announcement, the company expects 2002 net profits to reach 63.5 billion rubles ($2 billion). Although Gazprom profits are down, Nesterov praised the company for increasing its 2002 gas output. Gazprom production levels have fallen over the past four years. Gazprom produced 264.9 billion cubic meters (bcm) in the first half of 2002 and expects to produce 530 bcm in the short term. Gazprom has also increased its exports to customers in Western Europe and Eastern Europe, in addition to maintaining customers in the former Soviet republics. (TGP)

The success of the "early-oil" Baku-Tbilisi-Supsa pipeline, which opened on 17 April 1997, encouraged Giorgi Chanturia and the Georgian government to promote other pipeline plans. An article in "Finansovye Izvestiya" on 25 February 1999 captured the approach: "Georgia is Developing a Regional Model for the Transit of Caspian Oil." Even before the completion of the Baku-Tbilisi-Supsa pipeline, Georgia was advancing plans for the "big-oil pipeline" from the Caspian Basin known as Baku-Tbilisi-Ceyhan (BTC). The continued support of the U.S. government would be key to this second project. Chanturia used his Western oil contacts and briefings to the U.S. government and Congress to promote the project. But not everyone was satisfied by the terms of the "early-oil" deal. According to "The Journal of Commerce" on 4 April 1996, members of the Georgian parliament complained that Georgia would receive only 17 cents per barrel versus the $2.46 per barrel that Russia would obtain. Chanturia countered that the Georgian pipeline required greater renovation than the Russian pipeline and that accounted for the difference in per-barrel transit fees.

In fact, much more was at stake than transit-fee revenue. Political support for the Georgian government was increasingly under pressure. President Eduard Shevardnadze agreed with cut-rate transit fees because of Georgia's precarious situation. Georgia needed the pipeline and the spin-off political support to follow. Chanturia became one of the key people entrusted with the task of ensuring that multinational oil companies brought with them Western government support and involvement. Georgia needed all the support it could muster and the pipeline could greatly contribute to this goal. The Georgian parliament ratified the Georgian-Azerbaijan accord to build the pipeline that would carry Azerbaijani crude to the Black Sea port at Supsa on 3 April 1996. "Rossiiskaya gazeta" on 21 June 1997 would later describe the situation in the South Caucasus as "oil being used as [a] foreign-policy tool."

Russia continued to pursue its interests and actively competed for the BTC oil pipeline, but through its territory to the port of Novorossiisk. The conflict in Chechnya and Turkey's concern that additional oil from the big or "main" pipeline would overburden the Bosporus Straits and enhance the chances of an accident in the heart of the bustling city of Istanbul, kept Georgia in the competitive game. However, Turkey also needed natural gas. This would require another pipeline. Russia again promoted its "Blue Stream" pipeline project under the Black Sea, while Azerbaijan and Turkmenistan tried to reach agreement on a pipeline across the Caspian Sea through Georgia to meet Turkish demand. In the end, these negotiations failed and Azerbaijan independently worked with Georgia and Turkey to build a pipeline to transport gas from the Azerbaijani portion of the Caspian Sea. Vital time, however, was lost. This pipeline gave way to the Baku-Tbilisi-Erzurum pipeline to transport Caspian gas to Turkey with up to 1.5 billion cubic meters of gas remaining in Georgia "free of charge" for five years. (see Chanturia interview in "Svobodnaya Gruziya," 4 October 2001) The Baku-Tbilisi-Erzurum pipeline is still far from decided and the Blue Stream project has already laid its pipelines under the Black Sea (see "RFE/RL Business Watch," 16 July 2002).

In both instances, Russian interests were directly competing with the Georgian-Azerbaijan alliance for Turkey's market, vital support, and involvement. Attempts to smooth the friction between Georgia and Russia attained limited results, but Chanturia, a Georgian insider, continued to look for ways to reach out to Russia while building relationships with Western colleagues and promoting Shevardnadze's vision of Georgia as the linchpin in the East-West Eurasian corridor. One of the first Western executives Chanturia came into contact with and developed a strong working relationship with was Chevron's Richard Matzke. In January 1996, Chanturia hosted Matzke's trip to Georgia in which he announced his intention to make Georgia one of the European routes for oil (via rail cars) from the giant Tengiz field in Kazakhstan (see Intercon's "Daily Report On Russia," 9 January 1996).

This relationship with Matzke would also allow for the exploration of other oil-development opportunities. In June 1996, Chanturia told Georgian television (see Intercon's "Daily Report On Russia" 26 June 1996) that Chevron had indicated there were probably between 200 and 300 million barrels of offshore oil reserves in the Black Sea. Cooperation with Matzke would also develop into another venture with Chevron -- the sale of automotive-lubricant products and the establishment of a Chevron office in Tbilisi in October 1998 (see Intercon's "Daily Report On Russia," 14 October 1998). GIOC Trading was established to distribute Chevron products in Georgia.

However, the political and diplomatic significance of the potential offshore oil deposits did not go unnoticed. Chanturia seized upon this information and its significance as a possible incentive to the Abkhaz government to settle its dispute with the central Georgian authorities. Chanturia proposed to the Abkhaz that if a political solution could be found to the conflict, then it would be possible for the reconstituted local autonomous Abkhaz government to share in the proceeds from any offshore oil development near its territory. Attempts to engage the Abkhaz failed to produce any significant interest in the period 1996 to 1997, according to a diplomatic source. However, after Abkhaz leader Vladislav Ardzinba visited Tbilisi with Russian Prime Minister Yevgenii Primakov in August 1997, he told "Kommersant-Daily" (Moscow edition on 19 August 1997) that "he had examined with representatives of Georgia very interesting proposals pertaining to oil projects." Unfortunately, nothing more transpired after the positive comment.

Some speculated that lack of support from the Russian side might have been a contributing factor to the halting of the project. Chanturia attempted to engage the Russian side and point out the importance for them of supporting a political settlement to the Abkhaz conflict. This led to the proposal of building a pipeline through Abkhazia, linking the Russian port of Novorossiisk with the Georgian Black Sea port of Supsa. On 6 August 1997, the Azerbaijan News Service reported that Chanturia, as president of the Georgian International Oil Company (GIOC) and Georgian ambassador to Azerbaijan, intended to present his plans for this pipeline to the Azerbaijani and Russian governments. Efforts to present the idea to Russian President Boris Yeltsin and others in the Kremlin failed, however, to generate any enthusiasm, due to linkages to the Abkhaz conflict. The Georgians concluded that the time was not right for the project, and the idea continued to languish until 2002.

Abkhaz representatives have consistently maintained their interest in various economic projects, as well as their opposition to any linkages with a peace settlement. On 6 May 2000, Caucasus Press reported that Astamur Tania, adviser to Abkhaz separatist leader Vladislav Ardzinba made this absolutely clear. "Unless the Georgian side stops creating a political background for any economic project in which Abkhazia is likely to be involved, there will be no realistic prospects for their implementation.... While the Georgian authorities do not want to change their stand on the issue, we do not intend to implement any economic project which would make the Abkhaz people relinquish their right for independence," he said.

It would take the improved relationship between Russia and the United States, due to cooperation in the war on terrorism, for the Georgian government with Chanturia to resurrect the "peace" pipeline through Abkhazia. This time, the Georgian government and Chanturia approached the Russian government on potential pipeline projects. Chanturia acknowledged in an interview in "Rezonansi" on 30 May 2002 that President Shevardnadze himself proposed this pipeline project to President Vladimir Putin during the previous CIS Summit in Almaty. In March 2002, Georgian National Security Adviser Tedo Japaridze's met with President Putin in Sochi, Russia, "after which President Putin publicly announced that this project might be very important for Russia and that he was going to coordinate [it] personally."

Georgia, anxious to improve its relations with Russia and encouraged by the United States, pursued this opening. According to GIOC calculations, the pipeline through Abkhazia could generate an added $500 million to $600 million in revenue annually to the Russian government, Interfax reported on 27 May. The first step, however, entailed the establishment of a joint venture between GIOC and a Russian partner, Rosneftegastroi. The political and diplomatic implications of the project were transparent. Resolution of the Abkhaz conflict could produce benefits for all parties.

Another attempt to raise this issue during 2000 drew criticism from friendly quarters. "Gia Chanturia is a diplomat and politician, not an oil or construction expert.... I do not understand how Chanturia can be raising this issue when the Supsa terminal [Georgian port on the Black Sea] has already reached full capacity" said Natiq Aliev, the president of the State Oil Company of the Azerbaijan Republic, Caucasus Press reported on 16 May 2000. Aliyev raised the issue concerning the presentation Chanturia was scheduled to make in Istanbul at the Eurasian Energy Corridor conference. Aliev, while skeptical, eventually modified his criticism when he realized that the pipeline project would connect to the "big-oil" BTC pipeline, not the "early-oil" Baku-Supsa pipeline, which was at capacity and the Azerbaijanis were concerned this new approach might delay the multinational oil companies' commitment to BTC. He remained skeptical. Concerning Aliev's statement, Chanturia might be the first to be described as Georgia's oil diplomat.

In 2002, plans for the Russian-Georgian pipeline were promoted once again. Gia Chanturia suggested on 17 March that the construction of a connecting oil pipeline from Novorossiisk, Russia, to the BTC pipeline could be linked with the renovation of the railroad through Georgia's breakaway Abkhazia region to Supsa, Georgia. This could relieve pressure on the port of Novorossiisk for Russian oil exports, especially during the winter months. Turkey would benefit from reduced Bosphorus tanker traffic. Armenia could also benefit from a reactivated railroad, which was necessary for Russian goods and trading. The railway through Abkhazia has not operated since the Georgian-Abkhaz conflict in 1992-93. In short, many believe that the greater involvement of Russian businesses in pipelines and other businesses throughout the Caucasus could positively contribute to the resolution of many simmering conflicts. (see "RFE/RL Business Watch," 26 March 2002)

According to a telephone interview for the 29 May issue of Intercon's "Daily Report On Russia," Chanturia described the time as being right for greater cooperation between Georgia and Russia. Chanturia's comments followed the announced intention of GIOC and Rosneftegazstroi to form a joint venture named Gruzrosneftegazstroi to promote various pipeline projects, including the Novorossiisk-Supsa pipeline. After a decade of frozen relations with Abkhazia, difficulties for reconciliation are enhanced. U.S. Ambassador to Russia Alexander Vershbow pointed out in a 22 July speech in Moscow that as long as conflicts such as Abkhazia are unresolved, they threaten the peace. Many experts describe this project as a pipe dream, but one thing is certain, Chanturia will be in the lead of energy-pipeline diplomacy as president of GIOC, irrespective of the outcome of the Russian-Georgian pipeline. Finally, efforts to resolve the Abkhaz conflict require Russian leadership, support, and credible economic opportunity. (PMJ)

The World Bank warned in May that AIDS is threatening not only the health of Russians, but also the health of the country's economy, RosBusinessConsulting reported on 16 May. Since that bleak warning was issued, the situation has continued to deteriorate and the chorus of alarming reports have multiplied concern. According to a World Bank report, AIDS's cost to Russia's national wealth and the country's "physical capital," could reduce the gross domestic product (GDP) by 4.15 percent in 2010 and 10.5 percent by 2020. This catastrophic impact will multiply as the death rate rises and combines with a myriad of other related problems from alcoholism to communicable diseases. Regrettably the response from the Russian government continues to lag behind.

On 25 July, Vadim Pokrovskii, head of the federal scientific center on the prevention of AIDS, described the program to combat AIDS in Russia as funded at only 10 percent. "Some 190 million-200 million rubles ($6.03 million-$6.35 million) are spent annually in Russia for this purpose. However it is necessary to allocate 10 times as much to make the campaign against AIDS effective," he told a conference on the subject according to RosBusinessConsulting on 25 July.

"If Russia fails to take urgent steps to stem the rampant spread of HIV, Russian President Vladimir Putin could see his hopes for strong annual growth over the next decade evaporate into thin air, according to a World Bank model to forecast the economic impact of the infection," reported Intercon's "Daily Report On Russia" on 17 May. Christof Ruhl, the chief economist of the World Bank's Moscow office, said in an interview, as HIV spreads through society, the economy suffers from a decline in the workforce, while enormous health-care costs eat up money that is desperately needed for investment in industry and infrastructure.

In May, when the World Bank report was released, Federal AIDS Center head Pokrovskii commented that 194,033 Russians were registered as HIV-positive, but the actual number is probably closer to 1 million. On 25 July, First Deputy Health Minister Gennadii Onishchenko announced at a HIV-AIDS conference that there are now 203,300 HIV carriers in Russia, reported RosBusinessConsulting. According to comments by Labor Minister Aleksandr Pochinok on 16 May in "Moskovskii komsomolets," Russia's "present demographic situation is almost irreversible." He also warned that if trends continue at a moderate rate by 2034, the number of pensioners will equal the number of workers.

The Russian State Statistics Committee released figures on 16 May showing that Russia's population in 2016 may decline by 10.4 million and constitute slightly over 134 million people. Olga Samarina, of the department for socio-demographic policy at the Labor and Social Development Ministry, said that the population in the extreme north of the country might be reduced by 12 percent, the "Daily Report on Russia" reported on 17 May. Samarina noted that the life expectancy of Russian women now ranks 100th in the world, while Russian men rank 134th, RIA-Novosti reported 17 May. In March, the Russian State Statistics Committee released figures that by 2016 only 11 out of 89 federation subjects will have a satisfactory demographic situation. The highest growth rates are expected in Chechnya, Daghestan, Ingushetia, and Tuva. The biggest population drops are expected in the cities of Moscow and St. Petersburg, as well as in the Ivanovo, Smolensk, Ryazan, Kaluga, and Novgorod oblasts (see "RFE/RL Newsline," 4 March 2002).

At the International AIDS Conference in Barcelona, Spain, on 9 July, it was announced that the AIDS epidemic is spreading faster in the former Soviet Union than anywhere else in the world, "The Guardian" reported on 10 July. This spread is likely to reach other parts of Europe. Speaking at the conference, Director of International Harm Reduction Development Kasia Malinowska-Sempruch said: "As a native of Poland, not only am I terrified at the prospect of the rapidly growing HIV epidemic, but I'm frustrated and angry as well.... The world celebrated with us when the Berlin Wall fell, and then left us alone to deal with the consequences." HIV infection has been doubling yearly in former Eastern-bloc countries for the past three years. In Ukraine, 1 percent of the country's 48 million population is believed to be infected with HIV (see Intercon's "Daily Report On Russia," 11 July 2002). Transmission of the disease is particularly high among drug users where one in four have contacted the disease. Dr. Malinowska-Sempruch said, "Economic despair, social dislocation, and easy access to heroin and other opiates have all contributed to an explosion of drug use." She added, "If the world is unable or unwilling to turn its attention to this region and offer help in dealing with this looming disaster, the consequences will be horrific," "The Guardian" reported.

The skyrocketing statistics of HIV infection in Russia, leave many researchers in near panic over future prospects. According to an 11 July article in "The Wall Street Journal," U.S. researchers from the Centers for Disease Control (CDC) working with their Russian counterparts conducted a survey among 400 homeless women in Moscow. While results of HIV infection among those studied were low, around 3 percent, their risky behavior and high rates of sexually transmitted disease are not a good harbinger. Since HIV can be transmitted sexually with risky behavior, the chance of the rapid spread of HIV remains high. According to the survey, 45 percent of women under 18 and 54 percent of adult women exchanged drugs or money for sex. Of those women, 38 percent tested positive for syphilis. Many of the women who sell themselves for sex in Moscow ply their trade near the train stations. "If you think about how central Moscow is and how the trains go everywhere," then it is easy to see how the virus could spread, Sevgi Aral, a CDC researcher involved in the study, told "The Wall Street Journal."

U.S. Ambassador to Russian Alexander Vershbow, in remarks titled "Russia, the United States and the Challenges of the 21st Century" made at the Moscow School of Political Studies on 22 July, asked a number of pressing questions related to the troubling statistics and trends. "It's precisely here, on the level of society, that Russia poses the greatest number of question marks. Some of the questions relate to the physical ravages of the Soviet past. Will Russia be able to cope with rising drug addiction, alcoholism, and the accelerating spread of HIV/AIDS? Will Russia be able to reverse the decline in life expectancy and low birth rates that threaten to reduce Russia's population from 140 to 100 million people by the middle of this century?"

These are questions that require a societal response in Russia. However the safe space for citizen discussions is continually restricted due to media restrictions and lack of development in civil society. Russia will also need international support and cooperation. All of this is linked to Russia's international standing and its perception as a cooperative member of the world community. Strides have been made in this positive image with the fight against terrorism, but Chechnya and construction of the Bushehr nuclear-power plant in Iran cloud that positive perception. Failure to reverse these trends threatens not only the economic life of the Russian state, but also its very existence. (PMJ)