Business Watch: September 21, 2001

Rosneft oil company will increase the volume of oil production to 17 million tons in 2002 compared to 15 million tons in 2001, Rosneft's President Sergei Bogdanchikov said during a business trip to Komsomolsk-on-Amur. Bogdanchikov held a meeting with the executives of the Komsomolsky Rosneft Oil Refinery on the results of the refinery's production in the first eight months of this year. The volume of oil refined reached 2.626 million tons and exceeded the figure for the corresponding period last year by 6.5 percent, RosBusiness Consulting reported.

At the "Oil and Gas Export by Caspian Countries via Russia" conference in Moscow, Mazeikiu Nafta General Director James Scheel announced on 19 September that Russia's oil giant Yukos will finally become the holder of 26.85 percent in Mazeikiu Nafta by the beginning of October. Earlier, Yukos and Williams International Company concluded a contract for Yukos' acquisition of shares in this Latvian-based company for $75 million. Yukos will also grant $75 million in loans for the modernization of the Mazeikiu refinery. Additionally, under this agreement, the Russian oil producer will supply 4.8 million tons of oil to the Mazeikiu refinery and 4 million tons of oil a year to the terminal in Butinge. The parties will finalize the deal at the end of October, RosBusiness Consulting reported.

The Baikal Lake area is bracing for the construction of an oil pipeline between Russia and China, ITAR-TASS reported on 21 September. The city of Angarsk, from where it will begin, started building four tanks with a total capacity of 30,000 tons and a transit trestle work. The Irkutsk office of the Yukos oil company said that $18 million was allocated for it. According to the intergovernmental agreement signed in early September, the pipeline will be a continuation of the operating Omsk-Angarsk trunk pipeline. It will cross the Trans-Baikal area from Angarsk to the city of Daqing in northeastern China. The Russian companies Yukos and Transsneft, and the Chinese Oil Company, are working on the project, and will participate in its implementation. According to the plan, China will receive 20 million tons of oil annually at the initial stage (2005-2009), mostly from western Siberia. Starting from 2010, the volume of deliveries will rise to 30 million tons due to the development of deposits in the Krasnoyarsk, Yakutia, and Irkutsk regions. The current annual export of crude from Russia to China by rail is below one million tons.

Russia's Federal Securities Commission (FSC), the market's main watchdog, presented the draft of an unprecedented corporate governance code to investors. The code aims to bring local businesses to international standards. Analysts welcomed the code, but pointed out that it is not legally binding. Nonetheless, they believe it will be instrumental in improving Russia's business climate, Reuters reported. FSC head Igor Kostikov said he expected investors to follow the guidelines of the code, which the FSC drafted with the government and market participants. "Our target is...to make this document the unified standard for the securities market," he explained after an official presentation of the code. The code describes in detail the principles of corporate conduct, sets rules for general shareholders meetings, and defines the functions of a company board and executive bodies. It also describes procedures for corporate information disclosure, paying dividends, and settling corporate conflicts, Reuters reported. The commission plans to submit the draft code for the government's approval by the end of November and publish it by the end of this year or early 2002. Kostikov said the FSC planned to monitor violations of the code and publicize them. The United Financial Group (UFG) praised the content of the code. In a statement, the UFG noted: "This is a period of major regulatory advances in corporate governance in Russia, which is a crucial value driver for Russian equities�Even where companies have an interest anyway in better governance, improved legal sanctions and quasi-legal [such as the code] incentives will stimulate and systemize the process."

Russia's Volkhov Aluminum smelter and the Pikalyovo refinery of alumina, an intermediate product for aluminum production, will merge by 1 December, a property fund official told Reuters. Shareholders in the two plants, situated in the northwestern Leningrad region, decided in July to merge them into one company, with a provisional name of Metallurg, said Sergei Sokolsky, a department head at the northwest division of the Federal Property fund. According to Sokolsky, the state will have approximately 13 percent in the new company, which it intends to sell at a public auction. The remaining shares will be distributed proportionally between the current shareholders of the two plants. The shareholders of Volkhov, the country's smallest smelter with a design capacity of 20,000 tons of primary aluminum, are Glinozyom and LTR, each with a 50 percent stake. A representative of UK-registered Aimet UK Limited, Aleksei Shmargunenko, is Volkhov's general director and board chairman. Shmargunenko is also a board member at Pikalyovo, where the Maltese-registered Aimet and Shanton International own more than 63 percent of shares. The state has 20 percent. Pikalyovo, which supplies alumina to Volkhov and to the Volgograd smelter, produced around 200,000 tons of it in 2000, a plant spokesman said.

Russian Aluminum, the country's largest metal producer, said on 19 September it had postponed a 2 billion ruble ($68 million) domestic debt issue due, Reuters reported. "Lower interest rates on U.S. dollar-denominated credits as well as growing uncertainty regarding the currency rate mean Western financing is more profitable for exporters," Russian Aluminum's statement quoted Oleg Mukhamedshin, head of corporate finance, as saying. "Company plans to enter the international debt market are unchanged," he said. A company's spokesman said Russian Aluminum was considering issuing a Eurobond by the end of next year or a bond backed with metals exports revenues. According to the statement, Russian Aluminum attracted more than $300 million of trade financing in 2000.

Russia will announce terms to sell a stake of 16 percent plus one share in its biggest household insurer, Rosgosstrakh, at the end of September, according to the State Property Ministry. Earlier, when the ministry announced results of the sale of the first chunk on 7 September, First Deputy State Property Minister Aleksandr Braverman said the terms for the second sale would be announced a week later. A ministry spokeswoman said the delay was caused by a decision of Rosgosstrakh's board to introduce amendments to the company's charter aiming to protect minority shareholders' rights. Earlier this month, the government sold 9 percent in the insurer to Troika Dialog investment bank for 201 million rubles ($6.83 million). For the third sale, tentatively in early November, the government is offering a 25 percent share minus two shares, Reuters reported.

Russia's Central Bank will hold an auction on 4 October for $50 million in hard currency to help foreigners repatriate funds locked in special accounts since the 1998 financial crisis, a Central Bank official said on 20 September. Central Bank hard currency auctions are a favorite way for foreign investors to take funds from the so-called "S" accounts out of Russia, although there are other limited investment opportunities. The accounts hold ruble proceeds from GKO treasury bills that were restructured in the wake of the 1998 crisis, when the government defaulted on domestic debt and effectively devalued the ruble. The Central Bank also said it sold all of the $50 million it offered for an auction on 20 September, with demand for the funds far exceeding the amount for sale. The hard currency was sold at a minimum rate of 31.40 rubles per dollar with demand running at $138.69 million. The Central Bank held its previous hard currency auction on 9 July, selling $50 million at a minimum rate of 30.80 rubles per dollar. The demand amounted to $119.6 million.

The Russian economy may promote economic growth in many countries of the Commonwealth of Independent States (CIS), Russian President Vladimir Putin told Armenian businessmen in Yerevan on 15 September. "The Russian economy is gaining momentum and may become the locomotive for economic growth in many CIS countries, and Armenia is not excluded," he said. "We are working on economic projects in the fields of energy, military-industrial complex, transport, metallurgy, and chemical industry, taking into account the interests of private business," Putin said. "Russia attaches special significance to cooperation with Armenia in the fuel and energy sector," he said. He noted that major Russian enterprises "are ready to render their services to replace Armenia's aircraft fleet." Russian companies will also take an active part in a tender for the privatization of Armenia's energy system. Russian Deputy Prime Minister Ilya Klebanov said the tender will involve Russian companies -- Unified Energy Systems, Gazprom, Itera, and the Spanish firm Finoza. He said that a package of joint energy projects is being prepared, including projects to modernize the power generation and distribution networks in Armenia. Klebanov said the two countries are also drafting "a serious package of joint proposals in the field of industry." These projects aim at restoring the production of electronic components in Armenia. Putin noted that there is no direct transport corridor between Armenia and Russia and stressed the need to "restore transport links" between the two countries. He called for a ferry route between the Russian city of Novorossiisk and Georgia's Poti and said that Russian governmental agencies are working on this project. Klebanov added that, "the Russian Ministry of Railways is ready to start modernizing the Caucasus section of the railway as soon as the Georgian side gives its approval," ITAR-TASS reported.

Russian Gazprom may participate in the privatization of the Lithuanian Lietuvos Dues gas company. This opportunity was discussed on 17 September during Gazprom head Aleksei Miller's visit to Lithuania. The Gazprom delegation offered the Lithuanian leadership a parity model of the privatization of the Lietuvos Dues, stipulating the sale of 25 percent of the shares to its strategic foreign investor, which is the main supplier of gas to the republic, and the same number of shares to companies doing business on the Lithuanian gas market and to the Lithuanian government. In Miller's opinion, this type of privatization will prevent any of its participants from getting the controlling block of shares. This will guarantee Lithuania's reliable supply with gas and its transmission to the Kaliningrad Region of Russia. Gazprom is the main supplier of gas to Lithuania and it hopes that its role will be adequately assessed by the other partners. Gazprom's official stand on participation in the privatization will be formulated after the Lithuanian government announces the terms of the tender. "We are prepared for an open dialogue to guarantee the needs of Lithuanian gas consumers and effective work of the Lithuanian gas company," Miller was quoted by ITAR-TASS as saying.

Russian Deputy Premier and Finance Minister Aleksei Kudrin said on 17 September that the government might change its budget forecast for 2002. Kudrin said, "We will make our evaluation and if it shows that gross domestic product (GDP) could be larger [than predicted] then we will take that evaluation as our benchmark." The Russian State Duma's Budget Committee has requested that the GDP benchmark for the 2002 budget be increased to 11 trillion rubles ($373.5 billion) from 10.6 trillion rubles. The Duma wants more funds to be allocated to social spending next year, while the government is hoping to set aside as much income as possible to prepare for a peak in foreign debt repayments in 2003. Kudrin said Russia planned to borrow $2 billion via Eurobonds in 2003, Reuters reported. It faces a foreign debt bill that year of $18 billion to $19 billion compared with $14 billion this year and next. The government has said it plans to issue up to $2 billion worth of Eurobonds in 2002 to help deal with its debt. This would be the first Eurobond issue since the 1998 economic crisis. Kudrin said, "If we do not borrow next year, then in 2003 we shall have to borrow as much as $4 billion, because in 2003 we want to borrow $2 billion, too." The finance minister also noted that Russia would channel at least 60 billion rubles from unspent revenue this year to a special reserve to help Moscow cope with the 2003 debt peak. Russia's 2002 draft budget is drawn up with a surplus of 126.5 billion rubles. Out of this sum, 57.9 billion rubles are earmarked for the fund.

Russian metals giant Norilsk Nickel is in "no hurry" to sell platinum group metals (PGMs) on the spot market, Norilsk General Director Yuri Kotlyar told Reuters. "We are not in a hurry to go to the spot market. Today there is no need to sell [platinum group metals] on the spot market because it is feverish, depending on the stock markets, which have collapsed," Kotlyar stated. "Precious metals prices are increasing, but first we have to determine what the market's trend is. We prefer selling metals under long-term contracts," he said. According to Kotlyar, the bureaucratic problems that halted precious metals exports in August have been solved. "All the necessary documents for precious metals exports have been elaborated, coordinated, and mailed to all the bodies involved," he said. A presidential decree allowing precious metals producers to start direct exports became effective on 5 August, but a system for controlling the operations had not yet been prepared. Previously only the government and banks were allowed to export precious metals. Norilsk produces two-thirds of the world's palladium and one-fifth of the world's platinum.

The John F. Kennedy School of Government of Harvard University and Dow Jones announced that the 5th Annual "Jubilee" Russian Investment Symposium will be held in Boston from 1-3 November. The Symposium, "Reform and Renewal," will take advantage of the 10th anniversary of the fall of the Soviet Union and the 5th anniversary of the first Symposium to reflect both successes and failures of the past several years and to discuss the future of the Russian economy. The Symposium will feature speakers and panelists that will include financier George Soros, Internet guru Esther Dyson, Unified Energy Systems (EES) of Russia's Anatolii Chubais, Russian Economy and Trade Minister German Gref, and investment managers representing over $8 trillion in capital.

The Caspian Pipeline Consortium's (CPC) new oil pipeline from Kazakhstan to Russia has again postponed the opening of the pipeline. CPC head Sergei Gnatchenko declined to give the pipeline's official opening date, but pointed out that it will be ready to load the first tanker in three weeks. The official opening of the $2.5 billion 1,580-kilometer (987-mile) pipeline from Kazakhstan's giant Tengiz oilfield to Russia's Black Sea port of Novorossiisk has been postponed several times since its original 6 June schedule. CPC has given various reasons for the delay, the latest of which was the disappearance of expensive hoses for the loading of crude oil from the port of Novorossiisk. Gnatchenko said that the hoses had been found 150 kilometers away from Novorossiisk and that the company so far had no explanation for their misplacement. Gnatchenko said that the CPC may export four to five million tons of oil this year instead of the planned seven to eight million due to the delay.

The Russia-Belarus Union Secretary Pavel Borodin flew to Geneva again on another summons from Swiss investigator Daniel Devaud. Borodin will be questioned on 18 September for the sixth time. Swiss prosecutors suspect Borodin, the former Kremlin property manager, of money laundering. He was earlier implicated in taking kickbacks from the Swiss construction company Mabetex in a Kremlin renovation project. In August, Mabetex chief Behcet Pacolli was summoned for questioning for the first time. The cross-interrogation was unlikely to add much to the case material, as Borodin did not respond to questions, as he did at all previous meetings with the investigator. His lawyers told reporters he used his "constitutional right" to remain silent. Borodin has denied all the accusations, describing them as "absurd."

The Federal Securities Commission registered a 500-million ruble ($16.7 million) bond issue of Renaissance Capital Finance, a subsidiary of the investment company, Prime-TASS reported. The company is looking to issue 500,000 bearer bonds.

The press service of the Mosenergo power utility said that the seizure of the company began on 21 September, RosBusiness Consulting reported. At present, there are a lot of policemen from the central administrative district of Moscow near the Mosenergo building. They are supposed to help court officials enter the building. The press service surmises that court officials came to enforce the decision of the extraordinary meeting of Mosenergo's shareholders, which had been held on 31 August. This meeting was initiated by Unified Energy Systems of Russia despite court rulings that banned any meetings at Mosenergo. The court officials were ordered to oust Mosenergo incumbent General Director Aleksandr Remezov from the power utility's premises.

The International Monetary Fund (IMF) said it might increase its forecast for Lithuanian gross domestic product (GDP) growth this year, but not to levels as high as predicted by other financial experts. Mark Horton, the IMF's resident representative for Lithuania and Belarus, told Reuters, "We would still revise up our forecasts [for this year] from 3.6 percent, to about 3.8 or something like that but not as high as some other experts have been saying." He added that the IMF was not as optimistic on Lithuanian GDP growth partly because of its shrinking tax base and weaker than expected exports. He also said the government should stick to its budget deficit target of 1.4 percent GDP this year and 1.3 percent next year with an eye on increasing its tax revenue base instead of cutting expenditures. Last month, Lithuania entered a new standby deal with the IMF.

The director-general of Russian Aluminum Holding, Oleg Deripaska, established quite a career by the age of 26. Overnight he went from a modest broker at the Sayansky Aluminum Plant (SAP) to a king of the Russian aluminum industry. Skeptics say it is easier to climb a throne than to keep it, but Deripaska has kept his throne. Moreover, he belongs to an elite circle of President Putin's "new oligarchs." According to the Russian newspaper "Stringer," this small group of people decides on the strategy and tactics of Russia's economic development. Some say the group holds the fate of the entire nation in their hands.

For Deripaska, everything began in 1994, when he stood at the entrance of SAP in the small provincial town of Syanogorsk with a sign in his hands saying: "Buying shares of the plant at a high price." Paying cash right away, Deripaska found many workers willing to sell him their shares. After a month of this buying, to the great surprise of those same workers, Deripaska was introduced to them as director-general of SAP. After the miraculous takeover of SAP, Deripaska went through a number of events that jeopardized his life and his business -- Russia's 1998 default, the division of the spheres of influence among the oligarchs, a war with Anatolii Chubais against Lev Chernoy and Gazprom, the creation of Russian Aluminum, an alliance with Roman Abramovich, Putin's election, and his war against the oligarchs. Deripaska has not only survived the events which crushed many powerful oligarchs, but has also moved himself into the vanguard of the Russian business-political elite. He has proven his right to the title of aluminum industry king.

Since 1992, the export of nonferrous metals from Russia was controlled by Lev and Mikhail Chernoy, through the net of their Trans World Group (TWG) companies. TWG was established to open and register independent offshore companies that would spend the money from metal exports on the shares of Russia's metallurgical plants. This was a simple scheme, but it allowed TWG to subsequently takeover and own Russia's metallurgical plants. Political cover for TWG was provided by Oleg Soskovets, then first deputy prime minister, whose daughter at that time was Deripaska's fiance. The status of Soskovets' future son-in-law gave Deripaska an extra advantage to get closer to the Chernoy brothers. However, in 1997 when Deripaska's Sibirsky Aluminum was created, Lev and Mikhail Chernoy became business enemies rather than business partners. This created an opening -- Lev remained faithful to TWG, whose ultimate goal was to transfer the Russian metallurgical industry to foreign capital control. Mikhail, on the other hand, wanted to legalize the offshore capital, returning it to Russia and allowing Russian businessmen to control the metallurgical industry. The war among the oligarchs was inevitable and tough days began for Deripaska.

Getting ready for this decisive war, Deripaska increased his personal security and created an extensive security system consisting of an operational group, which "took care" of Deripaska's business opponents and spread disinformation against them; an analytical group, which provided public relations for Deripaska's projects; and a lobbyists' group, which pushed Deripaska's projects in the state and law enforcement agencies. Sibirsky Aluminum's security system employed exclusively former KGB/FSB and Interior Ministry officers. Rumors about Deripaska's ties with the KGB have been spread since his first days in business. In fact, when he was a student at Moscow State University, Deripaska worked as finance director at the Military Investment Insurance company. It also helped Deripaska in his successful career development.

Faithful to Mikhail Chernoy, Deripaska survived the oligarchs' wars for the redivision of spheres of influence and safely emerged after the 1998 Russian economic crisis, which was detrimental for many. Deripaska appeared to have made the "right" personal connections. After breaking up with Soskovets' daughter, Deripaska proposed to Boris Berezovsky's daughter. He ended up, however, marrying the daughter of Kremlin adviser Valentin Yumashev. "Karyera" magazine stated that Deripaska is extremely ambitious and is someone who will definitely go beyond his business horizons. The magazine speculates that Deripaska may be aiming to expand his influence into the political sphere by attempting to become Russian premier. His connections with Grigorii Luchansky and Izmailovo syndicate crime boss Anton Malevshii may, however, complicate matters. On the other hand, music producer Vladimir Dubovitsky, banker Aleksandr Mamut, and Valentin Yumashev of the Kremlin will no doubt assist any of Deripaska's political ambitions.

The bureau of the Russian Union of Industrialists and Entrepreneurs (RUIE) joined forces with Unified Energy Systems' head Anatolii Chubais on 20 September in his battle against the head of Russian Aluminum, Oleg Deripaska, for control of Russia's energy market. Gazeta.ru speculated that this proves a split among the oligarchs and that Deripaska is responsible. On its website, gazeta.ru reported that the essence of the dispute goes to the heart of the new energy reform in Russia. The main issue of the unfolding energy reform is the creation of the Trade System Administrator (TSA). TSA will coordinate sales on Russia's energy market, which is yet to be formed. Whoever gets control over TSA will control all the payments to the market.

Until recently, there have been two opposing approaches concerning who will be in the establishing body of TSA. The first approach is that of Deripaska, Sibneft's Roman Abramovich, state-controlled company Rosenergoatom, and their close associate, the head of the Federal Energy Commission, Georgii Kutovoi. According to this group, the founders of TSA must be six major energy producers and consumers. Among these producers would be EES, Rosenergoatom, Irkutskenergo, Bashkirenergo, Tatarenergo, and independent producers. Among the consumers would be Russian Aluminum, Sibur, Transneft, and Urals Mining Metallurgical Plant. According to the charter, suggested by Deripaska, the maximum number of votes of each of the founders would be 25 percent.

Chubais adamantly disagrees with Deripaska. Through its branch company Center of Agreements and Payments (CAP), Chubais's EES controls 80 percent of the existing energy market. Obviously, Chubais does not want to decrease his share from 80 to a mere 25 percent. He suggested a compromise -- EES takes 50 percent of TSA, and the remaining 50 percent will be divided among other participants. Although Chubais's opponents call this division "domineering," he calls it "parity." Generally, having agreed to share power, he does not lose anything.

Until 20 September, the officials at EES did not believe that their boss's arguments would find any support. Many considered the deal too obviously beneficial for EES. However, the meeting of RUIE proved otherwise. All 27 members of the bureau except for Deripaska and Aleksandr Mamut, head of MDM Bank, voted for the Chubais variant.

According to gazeta.ru, the secret of Chubais's success is very simple. The head of EES took advantage of a mistake by Deripaska. Deripaska wanted to restrict the group of shareholders by his own consumers � Russian Aluminum and his close associate Iskander Makhmudov's Urals Mining Metallurgical Plant. Among the producers, Russian Aluminum would also have a good representation -- "friendly" Rosenergoatom and Russian Aluminum controlled Irkutskenegro and Krasnoyarsk Power Station. Deripaska chose to ignore the interests of other oligarchs, even those of Vladimir Potanin of Norilsk Nikel, and Aleksei Mordashov of Severstal. This assured his defeat.

To say the least, the oligarchs got upset. As Potanin stated at the bureau meeting, he shares the opinion of EES and he views TSA "as an independent trade square, which will ensure a balance of interests of energy producers and consumers." Thus, the bureau supported Chubais and gave him 50 percent in TSA under the condition that the remaining 50 percent will belong to a number of companies, but not Deripaska alone. The decision of the bureau was sent to Russian Deputy Prime Minister Viktor Khristenko, who is expected to announce a final verdict on 21 September.