Business Watch: June 8, 2001

Russian Trade and Economics Minister German Gref, who also serves as a Gazprom board member, confirmed that a report requested by the board and prepared by PricewaterhouseCoopers on Gazprom's relationship with Itera will be discussed at the annual shareholders' meeting on 29 June. The report will uncover whether Gazprom executives or their families own any shares or have other links with Itera. One stumbling block is the secrecy surrounding an offshore trust, through which many Itera shares are held, the "Financial Times" reported. Minority shareholders believe that the connections between the two companies led to asset transfers and transactions at below market prices to Itera.

Meanwhile, "The Times" of London wrote that American business circles are claiming that Gazprom is transferring money to Armenian arms dealers through its offshore accounts, according to Mediamax. The article "Energy Monster Feeding Russian Foreign Policy," published in "The Times," introduced the theory that while conflicts continue in Azerbaijan and Chechnya, foreign investors will not risk building pipelines in the regions. "This would be advantageous to Gazprom, which has been calling on [Russian] President [Vladimir] Putin to reject building the pipelines going to the West," the article states.

The route for a new gas pipeline from Russia to Europe via Poland and Slovakia bypassing Ukraine has been approved, Gazprom officer Yuri Komarov announced at a news briefing on 4 June. The approved plan coincides with the initial plan proposed by Gazprom, but it underwent some changes in order to exclude the construction of a pipeline in the territory of Polish national parks. The pipeline will pass through the town of Kobrin in Belarus to Kapushan in Poland. Participants of the project are considering sources for financing the construction of the pipeline. A consortium consisting of Gazprom, Ruhrgas, Wintershall, and some other European companies will conduct the construction of the gas pipeline. The new pipeline will provide for new ways of gas exports to reach Europe and eliminate Gazprom's dependence on supplies via Ukraine.

Gazprom is forecasting export revenues of $13.6 billion in 2001 against $12.5 billion last year, Komarov said. He added that export revenues for the first five months of the year had grown to $6.5 billion from $4.7 billion in the same period of 2000. "The trend is that the peak on gas prices has already passed, but all the same, revenues this year will grow nine to 10 percent," Komarov said. Gas exports were seen stable at 130 billion cubic meters.

Following talks with Kazakhstan's Prime Minister Qasymzhomart Tokaev in Moscow on 5 June, Russian Prime Minister Mikhail Kasyanov said that the Caspian Pipeline Consortium's (CPC) trans-Caspian pipeline will be launched on 6 August. He added that the presidents of Russia and Kazakhstan had agreed to take under personal control the project of Kazakhstan's Tengiz oil transportation through Russian territory to the Black Sea port of Novorossiisk. Kasyanov and Tokaev discussed the legal status of the Caspian Sea, two countries' cooperation in oil and gas exports, and the prospect of Kazakhstan's joining the project of a North-South transport corridor. Russian and Kazakh transportation ministers have signed on the sidelines of the premier's talks an intergovernmental agreement on navigation on the Irtysh River.

The Sibirsky Aluminum Group and other defendants filed motions on 31 May to dismiss a $2.7 billion case under the Racketeering-Influenced and Corrupt Organizations Act (RICO), and argued that it should be transferred to Russian courts. In a press statement issued after filing its response in U.S. District Court in New York, the group said, "Russian courts can more appropriately deal with the allegations." The motion stated, "Stripped of its rhetoric and smear tactics, the lawsuit represents a wholly improper attempt to attack collaterally the decisions of Russian courts and administrative agencies." Sibirsky's lawyers refused to comment on the case. Mikhail Chernoi, one of the defendants named in the suit, is not a party in the 31 May motion. In December, a group of offshore metals-trading firms filed suit against Russian Aluminum, Sibirsky Aluminum, and key controlling individuals in those companies. Russian Aluminum controls more than 70 percent of Russia's primary aluminum production.

The RICO suit alleged criminal acts including murder, extortion, and intimidation to gain control of the assets of an aluminum plant in Russia, called Novokuznetsk Aluminum Zavod (NKAZ). The 31 May response to the suit charges that Base Metals Trading and other plaintiff companies are controlled by Mikhail Zhivilo, the former owner of NKAZ. A French court refused to extradite Zhivilo to Moscow on Russian charges of plotting to assassinate Siberian Governor Aman Tuleev. Zhivilo denied the allegations, calling them a set-up.

NKAZ had belonged to Zhivilo's company Metallurgicheskaya Investitsionnaya Kompaniya (MIKOM), which was accused of bankrupting the Siberian aluminum smelter. In bankruptcy proceedings last year, Russian courts decided that control of sales and supplies in the insolvent NKAZ should be passed to Russian Aluminum. There have been claims that Governor Tuleev was instrumental in facilitating the transfer of ownership in the aluminum plant to Russian Aluminum.

Mol, Hungary's oil and gas monopoly, offered to buy about 49 percent of chemical maker TVK, in a bid to block Gazprom's effort to take control of one of Mol's largest customers. Mol offered 4,184 forint per share ($14.14) for the stake, 3.5 percent less than the closing price on 28 May. Russia's Gazprom owns TVK shares through affiliates and through its control of Borsodchem, which owns 15 percent of TVK. If the bid is accepted, Mol will have won one of several battles with Gazprom, as both companies seek expansion in Eastern Europe. Even if shareholders reject the offer, Mol retains control of TVK, which buys naphtha from the oil company to make ethylene and will be better able to finance acquisitions in the region, analysts said. "At this price, the Russians are not going to sell their shares to Mol," said Peter Tordai, an analyst at IE New York Broker. "It wouldn't be easy for Mol to pay this amount (and) it doesn't want to pay it," Bloomberg News reported.

Media-MOST's exiled Chairman Vladimir Gusinsky has handed over his remaining 14.5 percent stake in Russia's Ekho Moskvy to the radio station's staff in an effort to protect the station's independence. The hand-over came just prior to a Moscow court ruling that Gusinsky's Media-MOST holding company should be liquidated. Alexei Venediktov said the journalists now wanted to secure a controlling stake in the station and then attract a foreign investor to help it fight off any threat to its independence. Venediktov said Ekho Moskvy's journalists have a 42.6 percent stake in the station and Gazprom had 25 percent plus one share. Still in dispute between Media-MOST and Gazprom is a 25 percent Media-MOST share frozen by the courts. If Gazprom were to acquire that disputed share, it would control the station. Gusinsky, who won a battle in a Spanish court to avoid extradition to Russia on fraud charges earlier this year, lost his NTV television station to the state-dominated gas giant, Gazprom, in April. His daily newspaper, "Segodnya," was shut down and the staff at his weekly news magazine, "Itogi," ousted in what he said was part of a Kremlin-backed drive to crush free media. Ekho Moskvy is the only major Gusinsky media outlet still operating.

Court officials seized accounts of the Ulyanovskenergo energy company in accordance with suits brought by the company's suppliers. "It is almost impossible to prepare the energy sphere for winter in the situation of a financial blockade," Ulyanovskenergo representatives stressed. The company's officials say that debts of regional housing institutions had initiated this crisis. In general, their debt totals 80 percent of all debts to the energy sector. As of today, only 25 percent have already been paid off. However, some institutions "haven't paid a kopeck" in May. The company intends to begin rotating power cut-offs in the middle of June.

Alfa Group plans to help Russian mobile phone company Vimpelcom secure an operator's license in the lucrative St. Petersburg market. Vimpelcom has applied for a mobile phone operator's license in the city in the past, but has yet to receive one. Vimpelcom announced on 30 May that Alfa would take a strategic 25 percent plus one share stake in the company and pay $220 million to help fund its regional expansion plans. Alfa Chief Executive Officer Mikhail Fridman said that first and foremost, "we will fight" for St. Petersburg and the surrounding region. St. Petersburg is dominated by a single GSM-standard operator, NorthWest GSM, which is partially owned by the politically well-connected Telekominvest holding. Vimpelcom's chief rival, Mobile TeleSystems, announced earlier this month that it had sealed a deal to acquire a St. Petersburg operator. "I hope that in a short time we can significantly increase the company's market capitalization and significantly increase its number of subscribers in the regions." As part of its agreement with Vimpelcom, Alfa will also take a 42 percent stake in the firm's regional expansion vehicle, Vimpelcom-R. Vimpelcom Chief Executive Officer Jo Lunder said Vimpelcom shocked the market last week by unveiling a $5.13 million profit for the first quarter of 2001, breaking a chain of chronic losses.

Russian gas giant Gazprom said on 6 June it will ask regulators to nearly double wholesale gas prices for domestic industrial consumers, bringing them closer to the prices paid by foreign customers. The move came less than a week after the Gazprom shareholders voted to replace the company's chief executive, Rem Vyakhirev, with Alexei Miller, an ally of President Vladimir Putin. Gazprom sells to domestic industrial consumers at $17 per 1,000 cubic meters, or less than a tenth of the price the company gets on foreign markets for the same gas, said Yelena Karpel, head of the company's pricing department. She explained: "It's only because of exports and credits that we can keep going....There is no link between domestic and export prices." In July, Gazprom will propose to the Federal Energy Commission a series of steep annual increases that will bring the price to $30 per 1,000 cubic meters by 2005, Karpel said. Gazprom already won an 18 percent price increase for industrial consumers in January. She says it has no plan to increase the wholesale gas price for home heating and hot water beyond a 25 percent increase in March.

Russian Deputy Prime Minister Ilya Klebanov and Indian Foreign and Defense Minister Jaswant Singh held talks on 4 June to discuss the joint production of the next generation of fighter jets and submarines under development in Russia. A contract for the joint production as well as for other arms transfers could be signed as early as 6 June, Klebanov said. Russia has also reached a basic agreement with India to sell A-50 airborne warning and control systems (AWACS) aircraft to India. Last December, Russia agreed to sell four Bariev A-50 AWACS to China for an estimated $200 million each. Singh said the value of India's existing defense projects with Russia stands at about $10 billion. He stressed that defense cooperation between the two countries in the future would focus on joint development and production of military transport aircraft and other projects. ITAR-TASS news agency also quoted a military source as saying India was eyeing several Russian A-50 long-range reconnaissance planes fitted with Israeli-made equipment.

In response to diplomatic tensions with the U.S., China has turned to a Russian aviation company for the purchase of Tupolev Tu-204 commercial airliners, similar to Boeing's 757. China is negotiating to buy 10 airliners, according to aviation weekly "Flight International." The order could potentially rise to between 30 and 32 units, it said. The Tu-204 is available in two main versions: one with western equipment, including Rolls-Royce engines; and one with equipment from former Soviet countries. Russian planes are not popular because they lack the support of an after-sales service and global support networks needed to supply parts and engineering expertise.

Rostelecom reported that year 2000 profit fell 28 percent, as expenses increased and as Russia's national telephone company lost market share in its growing competition with other long-distance providers. Net income fell to 1.03 billion rubles ($35.4 million) in 2000 from 1.43 billion rubles in 1999, based on Russian accounting standards. Revenue rose to 16.87 billion rubles from 15.21 bullion rubles in 1999, while the cost of selling goods rose 33.8 percent to 10.41 billion rubles. Konstantin Chernyshev, director of research at Nikoil Capital Markets in Moscow said: "These are in line with our expectations. The first reason is the change in accounting standards which cut net profit, and expenses are growing faster than their revenue." Rostelecom, which provides long-distance and international telecommunications services to regional and foreign telephone companies across Russia, is the second-worst performing stock on Russia's benchmark RTS index over the past 12 months, falling 61.7 percent. Rostelecom said it aims to increase profit by boosting international traffic and expanding its Internet business, Bloomberg News reported.

The Russian government raised oil export duties from 22 euros to 30.5 euros per ton. The average price for one barrel of Russian oil on world exchanges fluctuated between $25 and $32 over the past two months. According to the approved scale of oil export duties, the tariff of 27 euros per ton of oil is in line with this price. The figure of 30.5 euros was selected after the tariff of 27 euros was indexed by 13 percent. The government decree, signed by Prime Minister Mikhail Kasyanov, will enter into force one month after its official publication, reported "Rossiiskaya gazeta." The crude oil export tariff is set in euros once every two months and is pegged to the price of Russian Urals blend. Trade and Economy Minister German Gref chaired on 1 June the meeting of Russia's Commission on Protective Measures in Foreign Trade, which sets the tariffs in the absence of its head, Finance Minister Alexei Kudrin. The commission also decided to leave export tariffs on fuel oil unchanged at 20 euros a tons; diesel oil, naphtha, and gasoline at 39 euros a ton; and natural gas at 10 percent of its customs value, Reuters reported.

Deputy Trade and Economic Development Minister Arkady Dvorkovich told "Kommersant-Daily" that tax reforms could halve the proportion of firms in the shadow economy, currently estimated at almost a third. He noted that Russia's tax regime had already improved since part of the new Tax Code became effective on 1 January. He said: "The most serious changes to the tax system have already occurred. If the chapters of the second part of the Tax Code dealing with profit tax and taxes on mineral resources are adopted, all that remains are technical questions."

The government made tax reform a priority for this year and from 1 January a major cut in income tax came into effect, replacing a multiscale income tax with a flat 13 percent tax. The move was aimed at raising the number of registered taxpayers. Dvorkovich said plans for further tax reform could cut the number of firms in the gray sector of the economy to 15 percent from an estimated 30 percent currently. He said: "That is, half of these companies could come out of the shadow economy only through tax reform.... The general mood is that Russia's tax system at the present time precludes carrying out normal business. [But] a significant number of firms, regardless of changes in the tax regime, will stay in the shadow economy because they are following other interests." The deputy minister added that for those companies that refused to legalize their activities fully, law-enforcement bodies should adopt the most severe measures.

Russia's Federal Securities Commission (FSC) approved an American Depositary Receipt (ADR) issue by St. Petersburg utility Lenenergo on 6 June. The FSC said it would allow Lenenergo to carry out plans to covert up to 10 percent of its charter capital into ADRs. The Lenenergo board of directors approved the ADR program last November, which has been hailed by analysts who said that it would increase the liquidity of the utility's paper. One Lenenergo ADR will represent 80 common shares. The company has hired JP Morgan to handle the issue.



Last week, "Novaya gazeta" reported that the criminal tax evasion case was reopened against Sibneft's Roman Abramovich and that Russian President Vladimir Putin was tired of Abramovich's political pretensions. So the president in the heat of the moment decided to break up the three-way tango, a term used in political circles to refer to the close alliance of Roman Abramovich, Tatyana Dyachenko, and Valentin Yumashev. As Intercon reported last week, the current investigation concerns allegations that Sibneft failed to pay $12 million to $14 million in value-added taxes (VAT) and obtained tax privileges it was not entitled to. Bloomberg reports that the investigation is against Sibneft President Eugene Shvidler and involves 14 million rubles ($480,000) in unpaid taxes. He noted that prosecutors had previously investigated the company and resolved the case in Sibneft's favor.

Summoned for questioning, Abramovich had to report on the tax case and on the state's sale of Sibneft in 1995 to 1996, "Kommersant-Daily" reported. Sibneft First Vice President Alexander Korsik stated at a press conference: "We do not understand why the issues, which were already resolved in Sibneft's favor, appear again on the agenda. I do not know what the accusations are. If there were reasons to be worried, I would know this."

The question remains, however: Why is President Putin getting rid of his loyal financier and political manager? After all, Abramovich had taken Sibneft away from Boris Berezovsky, whom Putin the other day called "a traitor." Abramovich also brought the ORT network under state control. Finally, he departed to remote Chukotka peninsula so as not to wreck Putin's image as an "oligarch-free" politician. Is this government investigation directed at Abramovich himself or will Abramovich use it for his own purposes? Some Russian commentators have speculated that the case may be cleverly used by Abramovich to implicate specific individuals who he is interested in removing from Sibneft.

"Novaya gazeta" speculates that even from afar, Abramovich continues to influence the cabinet and Prime Minister Mikhail Kasyanov. According to sources in the Russian State Duma, officials close to Kasyanov worked via Abramovich and his resources in order to encourage a number of Duma deputies to endorse Kasyanov as prime minister and support his projects at critical moments. Apparently, the Kremlin, which holds control over the Duma and its voting behavior, did not like it. Moreover, the rumors on reshuffling the cabinet, including Kasyanov, have been in the air for months now. This is reported as the president's attempt to make the government more streamlined and efficient. On 29 May, Intercon reported that Putin criticized Kasyanov over the budget, saying that although Kasyanov was "working intensively every day...there are no results. There is no light at the end of the tunnel." Putin comments came two days after Kasyanov asked Putin to postpone the reshuffle.

The charges against Sibneft have been unleashed under Article 199 (tax evasion) of the Criminal Code. Everything was done according to the already existing tradition, tested in the cases of Media-MOST, Transneft, and other companies -- raids by masked security police and sweeping confiscation of documents. As an intelligent man, Governor Abramovich understands perfectly well that the Kremlin is ordering him to scale back his activities. This is not yet a matter of jailing him, the newspaper speculates, this just a warning sign. But what happens if Abramovich disobeys and continues to interfere with the government? Then the Federal Tax Police Service archives will provide certain lethal documents, which will be handed over to the Prosecutor-General's Office, and which will be included in the criminal case against Sibneft.

According to the tax police, Sibneft managed to understate VAT alone by 52.13 million rubles within just five months. Abramovich and his team also concealed revenues of 55.67 million rubles from sales of fuel and lubricants. These two figures added and exchanged at a pre-crisis rate total $21.58 million. Accusations against Abramovich get even more serious: "During inspections, Sibneft presents customs declarations with stamps confirming that CIS borders have been crossed -- but these are clear signs of forgery," the tax police said. According to the preliminary data from the Omsk regional police, the total sum which Sibneft has failed to pay to the state is 500 million rubles, which is around $100 million at a pre-crisis rate. All these documents were safely filed away. Now, there is a chance that they may be used in the tax evasion case. The article concludes that Abramovich's fate is sealed.

The question, however, remains: Is this Putin's next move in an anti-oligarch war which he launched over a year ago? Are these events directed at removing Abramovich from his economic and political structure and breaking it up or is this just the replacement of one oligarch for another? Maybe a loyalist from St. Petersburg? If the investigation is directed at Abramovich himself it will be the first high-profile move against an oligarch who has not openly criticized Putin or his policies, as Vladimir Gusinsky or Boris Berezovsky did through their media outlets.