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Business Watch: June 15, 2001


15 June 2001, Volume 1, Number 3
GAS & OIL
GAZPROM TO INCREASE FOREIGN INVESTMENT (13 June)
Gazprom Chief Executive Officer Aleksei Miller announced that he will allow foreign investors to purchase up to 20 percent of Gazprom, German journal "Wirtschaftswoche" reported. Miller reportedly hopes that Royal Dutch/Shell will purchase a 5 percent stake in Gazprom. But the weekly said that Royal Dutch/Shell officials are concerned about taking any such step because of corruption within Gazprom.

ITOCHU-EXXON CONSIDER GAS PIPELINE (13 June)
A Japanese consortium including Itochu Corporation and Exxon Mobil Corporation are considering a gas pipeline connecting Russia's eastern island of Sakhalin to Japan. The pipeline, if built, would be the first connecting Japan to an overseas gas field. "The final decision has not been made yet, but we are making a study along those lines," an Itochu spokesman said. Construction of the pipeline between the Sakhalin 1 gas field and Japan's northernmost island of Hokkaido would begin in 2005, according to an Itochu report. The pipeline, which the "Nihon Keizai Shimbun" business daily estimated would cost several hundred-billion yen to build, would eventually extend to the main Japanese island of Honshu. Exxon Mobil is leading an international consortium to develop Sakhalin 1. It and Japan's Sakhalin Oil and Gas Development Co. Ltd. (SODECO) each have a 30 percent stake in the project. SODECO is owned by Itochu, Japanese trading company Marubeni Corporation, and other firms. Russian oil firm Rosneft and its affiliate owned the remaining 40 percent stake in the field before India's ONGC Videsh Ltd. and Rosneft finalized a deal in which ONGC would buy half of the Russian firm's stake.

BUSINESS ALERT
RUSSIA TO INCREASE AUTO PRODUCTION (6 June)
At a meeting between Russian President Vladimir Putin and auto producers held in Moscow on 6 June, a decision was taken to increase production of domestic cars by 300,000 by the year 2006. They also said they planned to raise the quality level of production and modernize the existing model. According to Interfax, Russia plans to ban the production of ecologically harmful gasoline with a high lead content starting 1 January 2003.

RUSSIAN CAPITAL BACK TO RUSSIA (14 June)
The National Investment Council (NIC) worked out a scheme for returning legally earned capital back to Russia through a system of authorized banks, ITAR-TASS reported. On the sidelines of the fifth economic forum in St. Petersburg, NIC Chairman Aleksandr Lebedev said authorized banks "will be named by the president or the government from among major Russian banks." These banks will open accounts for Russian businessmen who want to return their capital to the Russian economy in return for anonymity. The banks will inform the government on the amount of money returned to the economy and on further allocation of this money. The money will primarily go to investment projects prioritized by the government, such as civil aircraft construction, Lebedev stressed. Within the first six months, the new program will bring "hundreds of millions of dollars" back to Russia.

RUSSIAN BUSINESS ABROAD
ITERA CUTS GAS SUPPLIES TO TBILISI (13 June)
Tbilgas, a Georgian gas company which is 50 percent owned by Itera, cut gas supplies to the city of Tbilisi on 9 June due to unpaid debts. Tbilisi owes the gas company $600,000 and Itera between $400,000 and $500,000. Georgian President Eduard Shevardnadze said the cut-offs were due to repair work and debts. Gas supplies were resumed following negotiations between Georgia's fuel and energy minister, David Mirtskhulava, Tbilgas President Aleksei Gotsiridze, and the management of Itera in Moscow. The supplies were resumed after the gas company received a letter of guarantee from local officials. Itera previously cut off gas supplies to Georgia on 1 January, during the harsh winter and strategically timed to coincide with bilateral negotiations. This time Russia is using Itera and its gas supplies as a lever in negotiations over the Russian withdrawal from bases inside Georgia and alleged Georgian support for Chechen rebels.

ECONOMIC NEWS & BUSINESS STATISTICS
RUSSIAN COMPANIES TO GET READY FOR WTO (10 June)
Russia's minister for anti-monopoly policies and entrepreneurial support, Ilya Yuzhanov, participating in a "roundtable" discussion on government and business interaction held in St. Petersburg, called on Russian entrepreneurs to prepare for severe competition on international markets after Russia enters to the World Trade Organization (WTO). The minister stated that current Russian anti-monopoly legislation was not only fully in line with European and world standards, but exceeds the latter with respect to regional interaction. Commenting on St. Petersburg's businesses, Yuzhanov said that the city can be fully competitive on the world markets in shipbuilding, military equipment, and beer production, strana.ru reported.

UPCOMING CONFERENCES
'HIGH-TECH, INNOVATIONS AND INVESTMENTS' TO OPEN IN ST. PETERSBURG (12 June)
The sixth international exhibition, "High-Tech, Innovations and Investments," opened in St. Petersburg on 12 June. Experts said the exhibition represents "the practical part" of the St. Petersburg Economic Forum opening 13 June. Gennadii Tereshchenko, Deputy Minister of Industry, Science, and Technology, told ITAR-TASS that the decline in science and lack of innovation are state-level problems. Radical changes should be implemented to develop fundamental science, innovation policies, and new technologies, he believes. The exhibition displays novelties in conversion technologies and industrial equipment. Most of the exhibits have already been presented to the market.

POLITICAL ECONOMY
DUMA AND GOVERNMENT TO COMPROMISE ON PROFIT TAX (4 June)
On the first day of June, the Russian State Duma and the government agreed on a proposed reform that would reduce the burden of taxes on profits. The government, which has made tax reform a priority, aims to get the Duma's approval for parts of the tax code relating to taxes on profits and abolishing turnover tax this year, making them effective at the start of 2002. It says its profit-tax reforms would reduce the overall tax burden by around 100 billion rubles ($3.43 billion) a year due to various deductions from the tax base, but the tax rate itself would be kept unchanged at 35 percent. Aleksandr Zhukov, chairman of the Budget Committee, said that in broad terms there is one main difference between the new and the old profit tax: The new law would allow businesses to fully deduct all their ordinary business expenses, with limited exceptions.

Meanwhile the Duma's budget committee backed a compromise to let banks and professional securities-market players create provisions for the depreciation of securities and agreed to limit the deductibility of bad-debt provisions by a percentage of sales. The two sides agreed on changes to amortization terms, aimed at saving the government up to 80 billion rubles. The sticking point on a 50 percent deductibility of capital expenses remained unresolved. The committee backed Duma proposals to extend this privilege to all firms, whereas the government wanted to confine it to manufacturing industries. The first reading of the profit-tax legislation concluded on 1 June. The second reading is set for 20 June. A final reading could come in July, before the Duma goes on summer holiday.

POLITICAL LOYALTIES FORCE TRETYAKOV TO RESIGN (6 June)
"Nezavisimaya Gazeta" Editor Vitalii Tretyakov was forced on 6 June to resign from the newspaper, owned by business tycoon and former Duma Deputy Boris Berezovskii. Tretyakov said he resigned over political differences with Berezovskii and a directional change in the newspaper. He said that Berezovskii wanted to change the focus of the newspaper to take a more critical stance toward President Putin. Berezovskii has accused the president of orchestrating an authoritarian regime and fears arrest if he returns to his native Russia. "I think that 'Nezavisimaya Gazeta' should have another niche [in the market], orientated toward the more active part of today's Russia, those who have started to live independently: the middle class. I believe a new leadership of the company could represent the interests of this section [of the population] in the media," he said.

Berezovskii, one of the key advisers to former President Boris Yeltsin, fell out of favor with Putin after supporting his rise to power through Berezovskii-controlled television and newspapers. It now appears that Berezovskii aims to use his media outlets and reputation to launch a political party to oppose Putin in the next elections. "The reason I want to return to Russia is politics. Now after one year of Putin's presidency, we have all the necessary conditions to form a real opposition�. Putin is really destroying what we created in the last 10 years," he said. Tretyakov has said that he will not work for "any party newspaper." He added that Berezovskii's newspaper is headed for a more pronounced political and party orientation, a move he does not support.

RUSSIA -- BELIEVE IT OR NOT
VODKA PLANTS RESUME PRODUCTION (12 June)
Some of Russia's major liquor and vodka plants, including Moscow's Kristall and Topaz, resumed operations on 12 June after nearly a two-week break. On 1 June, Russian vodka plants were shut down after a new excise-tax mechanism was introduced. Currently, only 10 percent of the closed plants have obtained the status of excise storage facilities in line with the new legislation. According to Pavel Shapkin, head of the National Alcohol Association, vodka production in Tula, Ryazan, Tver, Vladimir, Sverdlovsk, and some other regions is still suspended.

RUSSIA DROPS ONE WARRANT AGAINST GUSINSKY (5 June)
The Russian Prosecutor-General's Office has canceled one of its two warrants for the arrest of media tycoon Vladimir Gusinskii following complaints that issuing two warrants was illegal. Gusinskii, the founder of independent Media-MOST holding, was charged with fraud in November and arrested in Spain on an Interpol-issued warrant. Just days after the court ruling rejecting Russia's extradition request, Russia issued a second warrant, charging Gusinskii with money laundering. Russian law forbids issuing two warrants at the same time on different charges for the arrest of the same person. The second warrant has been canceled, but the prosecutor general's office said, "He is still wanted internationally."

WHO'S IN? WHO'S OUT?
'NEZAVISIMAYA GAZETA' HAS NEW EDITOR IN CHIEF (9 June)
At a meeting last week, the shareholders of "Nezavisimaya Gazeta" appointed Tatyana Koshkareva to the position of editor in chief. Prior to 1999, Koshkareva was the director of the paper's political section and headed the ORT directorate before being fired in 2000. Former Editor in Chief Vitalii Tretyakov announced his resignation based on "political disagreements" with the main shareholder, Boris Berezovskii, on 6 June. Berezovskii responded with an economic rationale for Tretyakov's resignation, according to which the media magnate was not satisfied with the financial results of the newspaper.

VARYOGANNEFTEGAZ APPOINTS NEW GENERAL DIRECTOR (9 June)
On 9 June, Sidanco subsidiary Varyoganneftegaz elected Sidanco's financial planning department head Khariton Kesov to chair its board. Kesov was previously the general director of Varyoganneftegaz. The board of directors appointed Yevgenii Bulgakov the company's general director. Bulgakov worked for Brown & Root Energy Services from 1994 to 1996 and headed Halliburton Arkhangelsk Ltd. in 1997.

ALEKPEROV, TIMOSHENKO, CHUBAIS TO LEAD THE BUSINESS ELITE (14 June)
A poll conducted by GazetaSNG and the Fund of Newly Independent States named the most influential representatives of the CIS business elite. The list included LUKoil President Vagit Alekperov, leader of the All-Ukraine Batkyvshchina movement Yulia Timoshenko, and chairman of United Energy Systems Anatolii Chubais. The poll was conducted among 321 business experts from 12 CIS states. "The Golden 20" of leading CIS businessmen also includes Rem Vyakhirev, Mikhail Fridman, Lev Chernoi, and Ilkam Aliev. They scored 5 out of 10 "influential points." Boris Berezovskii, Oleg Deripaska, Vadim Rabinovich, and Igor Makarov follow them on the list, lenta.ru reported.

WHAT'S UP? WHAT'S DOWN?
RUSSIAN ARMS AGENCY IN TURMOIL (13 June)
"Obshchaya Gazeta" reports that the Kremlin is disappointed with the leadership of the Russian arms-export agency. It believes that the agency has failed to generate the sales the Russian government hoped for. In the last six months, the two top leaders of Rosoboroneksport have failed to sign a single major new contract. As a result, the agency is in "turmoil" as its officers await new appointments, "RFE\RL Newsline" reported.

IN FOCUS
PUTIN'S WAR AGAINST OLIGARCHS: WHO IS NEXT?
In early June, "Novaya Gazeta" reported that a 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. The current investigation concerns allegations that Sibneft failed to pay $12 million-$14 million in value-added taxes (VAT) and obtained tax privileges to which it was not entitled. Bloomberg reports that the investigation is aimed at Sibneft President Eugene Shvidler and involves 14 million rubles ($480,000) in unpaid taxes. The news agency 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 and 1996, "Kommersant" daily reported. Sibneft's first vice president, Aleksandr Korsik, said at a press conference that, "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 Berezovskii, whom Putin recently 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 whom he is interested in removing from Sibneft.

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 junctures. Apparently, the Kremlin, which holds sway over the Duma and its voting behavior, did not like it. Moreover, rumors about reshuffling the cabinet, including Kasyanov, have been in the air for months. On 29 May, Intercon reported that Putin had 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's comments came two days after Kasyanov asked the president to postpone the reshuffle.

The charges against Sibneft were unleashed under Article 199 (tax evasion) of the criminal code. Everything was done in traditional fashion to that 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 that the Kremlin is ordering him to scale back his activities. This is not yet a matter of jailing him, 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 key documents that will be handed over to the general prosecutor's office and included in the criminal case against Sibneft. According to the tax police, Sibneft managed to understate VAT alone by 52 million rubles in just five months. Abramovich and his team also concealed revenues of 56 million rubles from the sale of fuel and lubricants. These combined figures, at a pre-crisis rate, total nearly $212 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 preliminary data from the Omsk regional police, Sibneft has failed to pay to the state a total of some 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. This means Abramovich's fate is sealed.

The question, however, remains: Is this Putin's next move in the anti-oligarch war that he launched over a year ago? Is it really getting rid of an oligarchical structure, or this is just a replacement of one oligarchy for another? 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 -- like Vladimir Gusinskii or Boris Berezovskii did through their media outlets.

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