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Business Watch: August 31, 2001

31 August 2001, Volume 1, Number 8
Russian petrochemical company Sibur, a unit of gas monopoly Gazprom, said on 29 August it will soon bid to buy Croatia's state-controlled chemical firm Dina. "The project seems to be interesting. We will start talks with the government of Croatia, where privatization is currently underway," Sibur's vice president, Sergei Zenkin, told Reuters. He said Sibur was mainly interested in Dina's polyethylene production, built by U.S. Dow Chemical in the early 1980s. He added that Sibur was also interested in Dina because Russian oil companies plan to start supplying large volumes of crude oil to the Croatian deep-sea Adriatic port of Omisalj. Russian crude pipeline operator Transneft and the country's second-largest oil producer, Yukos, are holding talks with the governments of Russia, Ukraine, Hungary, Slovakia, and Croatia aimed at integrating the Russian Druzhba pipeline with Croatia's Adria pipeline. The project would allow Russian companies to export up to 15 million tons of crude a year (300,000 barrels per day) through Omisalj and to bypass the Turkish straits between the Black Sea and the Mediterranean. Dina is part of petrochemical complex Dioki, which was privatized in Croatia's 1999 voucher scheme. Private investment funds control roughly 51 percent of the group, but the state still controls a large stake in the complex. Sibur controls up to 20 petrochemical plants in Russia and Hungary's second-largest chemical firm, BorsodChem.

Steel giant Severstal plans to build a new, $1 billion jeep facility at its subsidiary Ulyanovsk automotive plant, or UAZ, by 2008. The plant aims to reach full capacity -- 250,000 off-road vehicles a year -- by 2010, Severstal Deputy Director and UAZ Chairman Vadim Shvetsov told "Vedomosti" on 27 August. The prototype, designed by AvtoVAZ engineers and designers, should be ready by 2003. The jeep will have a 2.2- to 3-liter diesel engine produced by a sister company, the Zavolzhsky motor plant (ZMZ). The planned price tag is $20,000, placing it out of competition with AvtoVAZ and U.S. General Motors' planned Chevrolet Niva. In July, AvtoVAZ and ZMZ signed a letter of intent to produce up to 220,000 diesel engines per year, based on a model made by Austria's AVL.

Russia's bankrupt Belovo zinc plant is still looking for a buyer after three potential contenders declined to bid, the plant's executive director, Igor Nozdrin, stated on 28 August. Swiss-based metals trader Euromin AG and Russia's sole tin producer, Novosibirsk Tin Combine, along with Moscow investment company Finaco pulled out after visiting the plant, he told Reuters. Nozdrin declined to explain the reasons, but a spokeswoman for the town of Belovo in the Siberian region of Kemerovo, where the plant is based, said the poor condition of the plant was to blame. "The state of the plant is horrible," said Natalya Popova. "It has to halt work constantly, while the town is suffocated by its exhaust fumes." Nozdrin said that only one of the plant's two furnaces was currently functioning. "We stopped the other two months ago because of the market situation -- zinc prices are currently very low on the London Metals Exchange," he said. The plant will produce less zinc this year than last year, but Nozdrin declined to give the planned figure. The plant produced around 2,000 tons of zinc, including 1,700 tons of zinc powder, in the first seven months of this year, compared to 3,950 tons of both metallic zinc and zinc powder in 2000. Russia's largest zinc producer, Chelyabinsk, consumes all of Belovo's output. Belovo, commissioned in 1931, said it needs around $5 million to $8 million in investments to become self-sufficient. The plant's debts amounted to 170 million rubles ($6 million) by the beginning of 2001.

A Russian beer maker clinched a deal with U.S.-based ABC Service International to export beer to the United States starting mid-September. The American firm, which earlier specialized only in imports of Russian timber, will now expand trade with Russia by partnering with Afanasy-Pivo joint-stock company to bring the Russian brew to the U.S. market. The initial shipments of the Afanasy brand will total 320,000 bottles a month, Konstantin Sokolov, a spokesman for the beer maker, told Interfax. The scope of further deliveries will depend on the subsequent demand of the U.S. market, Sokolov said. The brand will be introduced to U.S. consumers at a beer fair in Las Vegas in September. After the fair, the beer will be shipped to retail stores nationwide. Afanasy-Pivo makes around a dozen different brands of draft and stout beer covering 2 percent of Russia's beer market and 4 percent of the market in Moscow. In 2000, the brewery invested around $12 million into modernization of its facilities in order to raise output to 10 million liters (2.6 million gallons) per year. The same year, an additional $6 million was invested into a bottle-making facility that produces 100 million bottles annually. In the first half of 2001, the company made 3.5 million liters of beer, a 74 percent increase on its output over the same period in 2000. By year-end, Afanasy-Pivo plans to produce 7.5 million liters (925 million gallons), surpassing last year's figures by 2.4 million, UPI reported.

Russian oil giant LUKoil plans to invest $1 billion in the Belarus oil industry, RIA Novosti reported on 27 August. At a meeting between Belarus President Alyaksandr Lukashenka and LUKoil head Vagit Alekperov, the latter said his company is ready to invest into the reconstruction of Novopolotsk refinery Naftan and petroleum-chemical complex Polimer. Alekperov expressed hope that the project will be supported by the Belarusian government. According to Alekperov, a draft agreement reflecting the interests of both parties could be worked out by a joint commission within a month. He also stressed that a favorable investment climate is being developed in Belarus.

Imports from non-CIS countries in the first three weeks of August rose 50.5 percent on the year, but fell 3.8 percent on the month to $1.661 billion, the State Customs Committee said on 27 August, Prime-TASS reported. According to the committee's preliminary data, non-CIS imports this year totaled $17.405 billion as of 20 August. Food imports rose 83.3 percent on the year, but fell 13.2 percent on the month to $383.5 million. Chemical products imports rose 34.8 percent on the year, but fell 3 percent on the month to $307.1 million. Machinery imports rose 45.2 percent on the year, unchanged on the month, totaling $621.3 million, while textiles imports rose 67.7 percent on the year and up 16.6 percent on the month to $82.0 million.

Ruspromavto, a subsidiary of Russian Aluminum, is likely to buy at least 51 percent in truck producer UralAZ by October, Pavel Yakovlev, executive director of the plant, stated on 27 August. He said a 25-percent-plus-one-share stake in UralAZ would be transferred to the Russian government at the request of the Defense Ministry. UralAZ is a major producer of trucks for the military. Yakovlev said UralAZ plans to increase its output to 12,500 trucks in 2002 from 10,000 expected this year. Sales revenues are expected to reach $350 million in 2002 from $250 million to $260 million expected this year. According to Yakovlev, the plant plans to export 4,600 trucks, including 3,000 to Iraq, this year, Prime-TASS reported.

Russia's Finance Ministry expects year-on-year consumer-price inflation to fall to around 17 percent at the end of 2001, helped by easing price pressures in the final four months of the year, Deputy Finance Minister Aleksei Ulyukaev stated on 28 August. The forecast is in line with the government's recent forecasts of 16 percent to 18 percent, which exceeds the budgeted 12 percent target. The year-on-year increase in the consumer-price index at the end of 2000 stood at 20.2 percent. "I think by 1 September the accumulated inflation [for eight months of the year] will be 13.2 percent, the same as it was on 1 August. I think in the remaining four months it will be less than 4 percent," Ulyukaev told Ekho Moskvy radio.

Russian cosmonaut Grigorii Grechko has been elected chief of the organizing committee for the Intercontinental Aviation Congress that will take place in Malaysia in October, a spokesman for the committee told the Military News Agency. The forum aims to pave the way for establishing an international consortium that will unite Asian nations interested in fuller use of the Russian aerospace industry's capacities, the spokesman said. Partner relations between Russia and Malaysia, as well as bilateral military-technical cooperation in the aviation sphere, are considered quite efficient. Malaysia can serve as a bridge connecting South-East Asia and Russia, promoting cooperation in the fields of high technologies, cargo delivery, and supplies of aircraft to the region. The congress will involve officials of the Russian Aviation and Space Agency, the Defense Ministry, large Russian and foreign airlines, aircraft production and repair plants, and banks, as well as leaders of Russian regions involved in aircraft production. Companies from over 60 countries will participate in the event.

Moscow Mayor Yuri Luzhkov signed a decree on conducting the fourth international investment forum, Moscow-Invest-2001. According to the mayor's office, the forum will be conducted in Berlin on 10-13 October 2001. The Moscow international business association and the German economic office in Russia will finance the organization of the forum. Moscow international business association has organized three similar forums before -- in London in 1998, in Moscow in 1999, and in Tel Aviv in 2000. These forums played a certain role in changing the investment climate of Russia in general and Moscow in particular, RosBusiness Consulting reported on 29 August.

Russia's government will adjust the rates of export tariffs on crude oil for 2002 in accordance with a new law on the customs tariff that is to become effective from 1 January, a senior government official stated. "We [the government] will need to have a mechanism handy in order to set oil tariffs in accordance with the new law," said Andrei Kushnirenko, secretary of the government commission for protective measures in foreign trade. The bill on the customs tariff has been passed by both chambers of parliament and now has to be signed into law by the president. It proposes setting maximum tariff rates for crude oil based on the Russian Urals blend price in the Mediterranean and in Rotterdam every two months. No tariff will be set if the price of a barrel of Urals is below $15 a barrel. A tariff of 35 percent of the customs value will be set at the Urals price of $15-25 and a 40 percent tariff will be set when the Urals price exceeds $25 per barrel. Kushnirenko told Reuters the commission will examine in October what tariffs will be effective until the end of the year.

Russian Prime Minister Mikhail Kasyanov has signed a resolution approving a raw-sugar-import quota of 3.65 million tons for 2002, the government press office told Reuters. An auction to award 2002 sugar-import quotas will be held within a month. A quota of 3.65 million tons of raw sugar may be imported at a preferential tariff rate of 5 percent of the customs value of the sugar, but no less than 0.015 euros per kilogram, the press office said in a statement. It said that 3.35 million tons of sugar may be imported within the quota in the first half of 2002, and another 300,000 tons in the fourth quarter. The quota, applied to sugar originating from developing countries, will be sold in 146 lots of 25,000 tons each at a starting price of 1 million euros per lot. Last year, traders paid $45 to $61 per ton for the right to import sugar within the quota. If some lots remain unsold or unpaid, another auction will be held in November or December, the statement said. Russia produces only around 1.5 million tons of white sugar out of around 5.5 million tons it consumes per year from domestic beets. The bulk of white sugar consumed is refined from imported raw cane sugar. Russia's Sugar Producers' Union, the sugar lobby, has said raw sugar imports above the quota this year could reach 1.8 million tons, exceeding consumption needs by one-third.

Russia suspended precious-metals exports from 25 August due to the absence of a mechanism for their control, a source at the Finance Ministry stated 28 August. A presidential decree on the rules for the imports and export of precious metals and gems became effective on 25 August, although a system of control over these operations was not prepared in time. "Now customs [officials] want an inspector who is not yet there," the source said, adding that the Finance Ministry was undertaking urgent measures to remedy the situation. "We don't yet have any confirmation that something has been stopped, but we are checking," a State Customs Committee spokeswoman told Reuters. The decree, signed by President Vladimir Putin in June, has long been sought by gold and silver producers, as it allowed them direct exports of the metals. Previously only the government and banks were allowed to export precious metals. But the new decree ordered the State Assay Chamber to carry out control of export and import transactions with precious metals, the technology for which has not been elaborated in time. The State Assay Chamber declined to comment. Russia, a major supplier of platinum group metals (PGM) to world markets, had to stop their exports, with sole exception of palladium, for the whole of 1999 due to a loose wording in a law amended only in 2000.

RosBusiness Consulting conducted a public opinion poll on 28-29 August and asked a question, "Do you think the competitiveness of goods improves after a company's victory in competitions like 'The company of the year' or 'The brand of the year'?" Over 3,000 people took part in the poll. The majority -- 1,713 respondents, or 54 percent -- answered that it will increase insignificantly. Some 761 respondents (24 percent) answered in the negative. Another 539 participants, or 17 percent, believed "yes, significantly," and 159 respondents (5 percent) were undecided.

In 1999, Hozh-Ahmet Nuhaev, the so-called "Godfather of the Chechen mafia," shifted strategy and focus. As his business plans for the Polish pipeline failed to muster the necessary political backing and investment support, his energies were redirected into political activities. Some say this northern oil route was nothing more than a diversion from the competing Baku-Tbilisi-Ceyhan oil-pipeline project. Another failure was his inability to obtain political support in Georgia for a new road to link Chechnya with the outside world. He also failed to acquire a large concrete production plant in Azerbaijan to support this and other projects. Georgia refused such a risky project, which would have been a de facto recognition of Chechnya. Nuhaev turned to his Chechen Islamic routes for inspiration. He organized and headed the public movement "Nohchi-Latta-Islam" with its headquarters in Baku. The motto became: "Chechnya's future is in its past." "We have to restore the old institution of blood kinship based on God's law of blood requital, which used to regulate all aspects of life in the Caucasus," he believes. "Our nation must be a hierarchical organism based on three pillars: fathers' faith, fathers' blood, and fathers' land. Blood kinship must be our core. All other aspects of public life, including education, culture, economy, and politics must be subordinate to it." One Chechen official interviewed described much of the doctrine as pure fabrication and went on to describe Nuhaev as not being grounded in reality.

Despite being sought by Russian federal authorities, Nuhaev participated in the international conference "Islamic Threat or Threat to Islam?" held at the President Hotel in Moscow on 28 June. Aleksandr Dugin's political movement, Eurasia, organized the conference with the support of the presidential administration. Its semi-official character was borne out by an official welcome letter provided to the participants from Russian State Duma Speaker Gennadii Seleznev. The goal of the conference was to provide an exact definition of Islamic extremism and explain how traditional Islam and Orthodox Christianity can and should co-exist. It is sensational and significant, reported, that a wanted criminal openly arrived in Moscow. The Federal Security Service (FSB) refused to comment on Nuhaev's visit to Moscow. The website concluded that without approval from the very top, Nuhaev's visit could not have taken place. Many of the rumors concerning Nuhaev thus appear to have been confirmed. For those who believe that Nuhaev is a protected agent of the Russian special services, their opinion will appear to be verified. Nuhaev's participation in the Islamic conference, sponsored by Dugin's Eurasia movement, is being described as his new starring role. At the very least, some say this script has been written by the Russian security service. The venue for the meeting is also symbolically important. It was held in the old Oktyabrskaya Hotel that was once reserved for visiting senior officials of the international Communist movement. This well protected, iron-fence-enclosed enclave will underline how the Eurasia political movement, with its anti-Western messages, are now under the protection and perhaps the direction of the highest levels of the Russian government.

Nuhaev's speech contrasted starkly with the messages he delivered in Western Europe and America in the 1990s, when he was attempting to raise funds for his various projects. Those speeches and talks won acclaim. In England, it paved the way for a meeting and, reportedly, limited support from none other than the "Iron Lady" herself, Lady Margaret Thatcher. Today, his message has changed. In the last two years, he has been refused a visa to even visit the United States. In his June speech before the Moscow Islamic conference on 28 June, Nuhaev transformed his cosmopolitan image into one promoting Islamic and Caucasian "blood" traditionalism. The man who was so eager to oppose Russia in Chechnya and obtain Western investment capital now promotes the expulsion of Western influence from the Caucasus. Nuhaev now describes Russia's war in Chechnya as an attempt "to clean its rim from agents of the West, to not allow the rise on its borders of bridgeheads of hostile forces." Of the strategies "which Russia can oppose to the expansion of the Atlantic forces," only a "strategy founded on the ideology of Eurasianism includes all indispensable conditions so that Russia can stand and achieve success in its opposition to the West."

This message appears to please the Russian government, which overlooked his crimes and service with the Chechen "bandits." The question remains whether his service to Dudaev and the Chechen leadership was legitimate. It also is a further indication of the growing influence the neo-fascist writings of Aleksandr Dugin are having within the Russian foreign-policy establishment. It appears that the continued efforts of Nuhaev to replace Chechen President Aslan Maskhadov politically are now taking a new direction: this time with transparent Russian blessings.

With silent government consent, Russian oil companies are actively pursuing projects overseas. The policy comes at the expense of Russia's domestic industrial development. On 29 August, central Russian newspapers reported that LUKoil and Yukos, two oil giants, had successfully passed the first stage of the tender for a 30 percent share in Hellenic Petroleum, the largest Greek oil company with refineries in Greece, Macedonia, and a network of gas stations in Greece, Macedonia, Albania, and Georgia. Earlier, LUKoil purchased a number of refineries in Romania and Bulgaria, and planned to acquire refineries and gas stations in Poland, Czech Republic, and the former Yugoslavia. LUKoil's bid for Hellenic Petroleum is supported by the Latsis Group, a part of the Latsis family business with an estimated capital of $3.5 billion. This alliance undoubtedly increases LUKoil's chances of winning the tender. However, this strategy is not new, reported. On the regional markets, Russian oil companies pursue the same strategy -- create alliances with the influential local businessmen and use these business ties to their commercial benefit.

LUKoil's foreign activities are not strictly limited to the energy sector. According to "Vedomsti," LUKoil is seeking to become a major player on the telecommunications market in Moldova. Telemedia Group, a LUKoil subsidiary, has already opened offices in Moldova. LUKoil is likely to participate in a tender over Moldtelecom, a national telecommunications provider. That tender will be held in the near future. The foreign telecommunications market is not new for LUKoil. One of its subsidiaries has been working in Azerbaijan's telecommunications industry over five years and is now expanding its activities. According to the director general of "LUKoil-Moldova," the company will also provide telecommunications services in Ukraine and Romania. He contends that it will not be "a supplementary" activity to the company's oil business. It will be a major, full-fledged project bringing in its own revenues.

Clearly, LUKoil's expansionist policy costs money. The market price for the 30 percent share in Hellenic Petroleum will stand at about half a billion dollars. Apparently, this price is not deterring oil companies that have yielded huge revenues due to high world oil prices. These foreign expansionist policies appear to have met with Russian government support -- the country's leadership longs for renewed superpower status. Russian energy companies offer the promise of increased political-economic influence abroad, where Russian government foreign policy does not. As "Vremya Novostei" reported, when the Hellenic Petroleum tender was announced, Russian Prime Minister Mikhail Kasyanov called for the revival of an abandoned oil-pipeline project from Bulgaria to Greece. The pipeline will allow Greece to make substantial revenues in transit fees. According to the newspaper, this move would be a decisive factor for the Russian oil companies' victory in the Hellenic tender.

According to, companies in the energy and natural-resources sectors allocate all funds from export revenues to foreign expansion. LUKoil and Yukos' activities confirm this trend. Unfortunately, the huge profits of energy companies do not translate into the domestic development of other industrial sectors in Russia. With the depressed value of Russia's currency, labor, and energy, the export of capital is a natural reaction by business, said Oleg Vyugin, chief economist at Troika Dialog Brokerage. Apparently, the government is comfortable with this situation, he said. Short-term foreign influence wins out due to long-term domestic industrial and capital development.

Russian energy and natural-resource companies are trying to become transnational to compete with the world's industrial giants. However, this trend in Russia is not complemented by domestic investment, which is either unprofitable or unwelcome. The creation of capital holdings has never resulted in domestic investment growth. Global rises in oil prices offered a real chance for implementing structural economic changes in Russia. This will probably not materialize. Unfortunately, the government remains passive, squandering an opportunity to encourage domestic industrial development in favor of foreign-policy influence and political expediency.