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Business Watch: September 28, 2001


28 September 2001, Volume 1, Number 12
OIL & GAS
GAZPROM DEVELOPMENT TO BE DISCUSSED (28 September)
The board of directors of the Russian gas monopoly Gazprom will consider the company's strategic development at a meeting on 29 September, a source in Gazprom told RosBusiness Consulting. The company's representatives previously announced that they would consider the introduction of a share-option scheme for Gazprom management. Some $50 million to $200 million will be allocated for implementation of the program.

RUSSIAN COMPANIES TO DEVELOP KUWAIT OIL (27 September)
Kuwaiti Petroleum Minister Adul Haled al-Subeih has praised the participation of Russian oil companies in a plan to tap the rich petroleum deposits in the northern part of the emirate, ITAR-TASS reported. The investment project, estimated at $8 billion, is a "tidbit" for leading world oil companies. During a meeting with Russian Energy Minister Igor Yusufov in Vienna on 26 September, the Kuwaiti minister said, "Durable relations in the key areas now exist between the two countries, based on mutual trust." Al-Subeih particularly stressed that the Organization of Petroleum Exporting Countries (OPEC) is determined to leave world petroleum prices at a level that suits both consumers and producers. In his opinion, the petroleum-producing countries that are not affiliated to OPEC had benefited most when the cartel "sacrificed its own interest for the sake of all" in order to avoid a repetition of the 1998 crisis in oil prices. He expressed hope that Russia, hand-in-hand with OPEC countries, would exert efforts to keep prices permanently stable -- and not only in cases when the situation on the market becomes critical and petroleum prices are near collapse. The Kuwaiti minister expressed the conviction that OPEC should work out a new mechanism to help keep prices at $22 to $28 per barrel in the long term. Al-Sabeih accepted "with satisfaction" Igor Yusufov's offer to visit Moscow in order to discuss details of future cooperation between the two countries, which are among the world's leading exporters of petroleum, and expressed the desire to visit Russian oil-refining enterprises.

BUSINESS ALERT
EUROBONDS PLANS UNCHANGED (25 September)
Russia's plans to issue Eurobonds in 2002 are unchanged, although falling crude prices could harm investor appetite in oil-dependent states, Finance Minister Aleksei Kudrin stated on 24 September. "The government retains the right to borrow up to $2 billion next year," Kudrin told Reuters.

USINOR TO BUILD GALVANIZING PLANT IN RUSSIA (25 September)
French steelmaker Usinor agreed with Russia's Severstal to build a galvanizing plant with an annual capacity of 400,000 tons in the Vologda region of Russia. Usinor said in a statement that the new plant, which comes in response to growing demand from the Russian auto industry for galvanized steel, should be completed in early 2004. Russian steelmaking group Severstal will control 75 percent and Usinor 25 percent of the joint venture, which will be registered in the Russian Federation.

RUSSIA: SAFE HAVEN FOR INVESTORS? (24 September)
The portfolio manager of Third Millennium Russia Fund, John T. Connor, argues on PR Newswire that -- in an increasingly uncertain investment climate around the world -- Russia stands out as a relative safe haven for investors. Connor cited recent developments among Russia's public companies, a stronger Russian stock market, the country's growth, and macroeconomic stability as the reasons for his conclusion. The statement came after a business trip to Moscow on which he met with senior executives from Third Millennium Russia Fund's portfolio and senior government officials.

RUSSIAN BUSINESS ABROAD
RUSSIA'S MTS WINS BELARUS LICENSE (24 September)
Russian Mobile TeleSystems has been announced a preliminary winner of Belarus' second GSM-standard operating license, a spokesman for Belarus President Alyaksandr Lukashenka said on 24 September. "The president said today that, according to the preliminary information which he has, MTS won the tender," presidential spokesman Nikolai Borisevich told Reuters. Five foreign companies bid for the second GSM-standard mobile-phone license to be awarded in the country of 10 million people. Moscow-based MTS made no comment on the news.

RUSSIAN-BRAZILIAN TRADE TO REACH RECORD FIGURE (25 September)
Russian-Brazilian trade may reach a record figure of $1.5 billion this year, ITAR-TASS reported on 25 September. In 2000, Brazil was at the top of the list of Russian trade partners in Latin America. The second meeting of the Russian-Brazilian Intergovernmental Commission for Commercial, Economic, Scientific and Technological Cooperation, which opened in Moscow, is expected to devote particular attention to the present level of commercial and business cooperation between the two countries and to its further prospects. The commission's co-chairman and secretary general of the Brazilian Foreign Ministry, Osmar Vladimir Chofi, is participating in the work of the commission. A minister and head of the Russian Government's staff, Igor Shuvalov, is co-chairman from the Russian side. Officials of the Brazilian embassy said that the commission was expected to sign a bilateral program for scientific and technological cooperation from 2001 to 2003. The Bank of Brazil and Russian Vneshekonombank are expected to sign a protocol on cooperation. The commission is subordinate to a top-level commission that was formed in Moscow in June 2000. Russian Prime Minister Mikhail Kasyanov and Brazilian Vice President Marco Maciel participated in the work of the first session, which defined the directions of Russian-Brazilian cooperation, primarily in the field of space studies and nuclear energy.

RUSSIA LENDS $250 MILLION FOR VIETNAM REFINERY (27 September)
The Russian government said on 27 September that it will grant a $250 million loan to the Russian-Vietnamese joint venture VietRoss for building Vietnam's first oil refinery. The funds will be pumped through state-owned Vnesheconombank and used mainly to finance the delivery of Russian equipment for the long-delayed refinery, the government said in a statement. The credit for the refinery, which will cost a total of $1.3 billion to build, is to be used from 2002 to 2004 and repaid between 2005 and 2013. State oil monopoly Petrovietnam and Russia's Zarubezhneft signed a joint contract in November 1998 to build a refinery in central Quang Ngai province. Vietnam currently has to import all its oil products. Construction is under way in the province, about 900 kilometers (560 miles) north of the country's main crude supplies. According to Reuters, the refinery is expected to produce gasoline, kerosene, diesel, fuel oil, propylene, and liquefied petroleum gas and to have a processing capacity of 130,000 barrels per day. The refinery was due for completion in 2002 or 2003, but Russia said the launch would be delayed for two years due to difficulties in selecting the proper equipment and raising funds.

RUSSIA-YEMEN SIGN $300 MILLION DEAL (26 September)
Russian aircraft manufacturer MiG has signed a $300 million deal with Yemen, "Vedomosti" reported. A high-ranking civil servant was quoted as saying that the deal had been struck two to three weeks ago. Yemen, where the U.S. destroyer "USS Cole" was bombed in October 2000, killing 17 sailors, has been pinpointed by the U.S. State Department as a potential safe haven for Muslim militants, given its porous borders and poor security controls. But Yemen has not been tarred with the same brush as Syria, Lebanon, and Iraq, who are accused of directly supporting terrorist organizations. MiG spokesman Sergei Samantov declined to comment on the deal. Russia's Defense Ministry referred all inquiries to Rosoboronexport, Russia's monopoly arms exporter. A spokesman for the company told Reuters that, "MiG has the right to sell its production directly to foreign countries. They are now exercising this right." The $300 million deal, with an option for a further $100 million purchase, could quadruple MiG's income, which totaled just $100 million last year. Yemen is one of MiG's most valuable clients, having purchased nearly 200 MiG planes between the 1960s and the 1990s.

ECONOMIC NEWS & BUSINESS STATISTICS
RUSSIAN GDP ROSE 5 PERCENT (24 September)
Russia's gross domestic product (GDP) rose 5 percent in the first six months of the year, the State Statistics Committee said on 24 September. The figure was lower than an earlier estimate for growth by the Economic Ministry of 5.4 percent for the period. The committee also said in a statement that GDP in the second quarter grew 5.1 percent after a rise of 4.9 percent in the first quarter. According to Reuters, Prime Minister Mikhail Kasyanov has forecast 5.5 percent GDP growth for the entire year of 2001.

TAX MINISTRY ACCEPTS VAT CLAIMS (26 September)
Of the 49.966 billion rubles (about $1.7 billion) in compensation for VAT payments claimed by Moscow's exporters in January to August 2001, tax agencies accepted claims worth 26.4 billion rubles (about $897 million), equal to 57 percent of the claimed amount, according to the Tax Ministry Department in Moscow. The state owed Moscow's exporters 31.226 billion rubles (about $1.06 billion) as of 1 September. Gennadii Gorbunov, head of the Moscow Tax Agency, pointed out that the amount of compensation for VAT payments claimed by exporters this year had exceeded that of the year 2000 by several times, although the volume of export to non-CIS countries rose only by about one-third. Moscow's exporters claimed 40 billion rubles (about $1.4 billion) in compensation for VAT payments last year, 22.134 billion rubles (about $752 million) of which was accepted. According to RosBusiness Consulting, 20.12 billion rubles (about $683.7 million) in VAT compensations were paid from the Russian budget.

ATOMIC POWER STATIONS TO INCREASE PRODUCTION (26 September)
Russian atomic power stations are expected to produce 138.5 billion kwh of electricity this year, which is 6.3 percent more than in 2000. The figure was reported at a meeting of the Russian public organization, Nuclear Society of Russia, held in Rostov-on-Don. Representatives of scientific organizations, the Atomic Ministry, Rosenergoatom nuclear concern, and the Rostov regional administration participated in the meeting. Atomic stations produced 130.3 billion kwh of electricity in 2000, which is more than the highest annual volume of production achieved during the Soviet period, the group reported. A rise in the volume of electricity production is accompanied by high security. The number of malfunctions in the work of Russian atomic power stations in 2000 dropped 29 percent compared to 1999. According to RosBusiness Consulting, Russian nuclear stations last year followed Japan in their level of reliability and safety. No independent verification could be obtained.

UPCOMING CONFERENCES
CIS CONFERENCE AND EXHIBITION TO OPEN IN MOSCOW (24 September)
The international conference and exhibition "Industry and Transport -- Cooperation and Collaboration" will be held in Moscow from 10-14 December, Prime News Agency reported on 24 September. The exhibition is organized by the decision of the Commonwealth of Independent States (CIS) Economic Council. It will display the results of economic, cultural, educational, and scientific development in the CIS for the 10 years of its existence. The program of the conference will include roundtables, seminars, fairs, and presentations of investment projects. More than 40 countries have reportedly expressed an interest in participating.

POLITICAL ECONOMY
RUSSIA TO PAY OFF FOREIGN DEBT (25 September)
Russian Economic and Trade Minister German Gref said on 25 September that Russia will meet in full payment obligations on its foreign debt next year, although there might be problems in 2003. "If everything is okay with the global economy we will pay everything next year," Gref told Reuters on the fringes of a conference with German business executives in Berlin during Russian President Vladimir Putin's visit. Gref said there could be problems in 2003 if prices fall for Russian gas and oil products. According to Reuters, Russian payments to foreign creditors are expected to peak in 2003 at some $18 billion to 19 billion, while Moscow has laid out plans for a budget surplus and a return to the capital markets in 2002 to meet those obligations on time. It must repay $14 billion next year. Hoping to restructure its $48.7 billion debt to the Paris Club of creditor nations, Russia did not initially include payments in its 2001 budget and missed first-quarter payments. After sharp criticism from the Paris Club, particularly Germany, Russia caught up on its the payments.

RUSSIA WANTS TO WORK WITH OPEC (26 September)
Oil-rich Russia will create a committee to strengthen cooperation with the Organization of Petroleum Exporting Countries (OPEC), monitor world oil prices, and regulate exports, Energy Minister Igor Yusufov said on 25 September. Yusufov said Russia has no plans to join OPEC in the near future, but said the committee will "strengthen cooperation with OPEC nations in areas such as oil production volumes and pricing policies." The committee will include Russian oil-industry bosses and government officials, Yusufov said. The committee will help Russia establish export regulations amid volatility in the international oil market. Yusufov was quoted by AP as saying that Russia is happy with its observer status in OPEC, which allows it to coordinate policy with the cartel "without binding itself to commitments." High world prices for crude over the past two years have brought the Russian economy welcome growth following a financial collapse in 1998.

2002 BUDGET PASSES FIRST READING (28 September)
Russia's State Duma voted to adopt the 2002 draft budget in the first of four required readings on 28 September. A total of 262 deputies in the 450-seat chamber voted in favor of the document, while 125 voted against and two abstained, Reuters reported. The draft law needed 226 voted to pass the first reading.

UKRAINE -- BELIEVE IT OR NOT
TANKS SMASH THROUGH UKRAINE GAS PIPELINE (28 September)
A column of Ukrainian tanks that lost its way to a military training ground smashed into a natural-gas pipeline, cutting off supplies on 27 September. According to a spokesman at the Emergency Ministry, the accident took place late at night, when the tanks were trying to find a route though rain and darkness to a training ground in central Ukraine. Emergency services shut off gas supplies to stop leaks at the regional pipeline between the towns of Berdychiv and Zhytomir. The line was repaired overnight. According to Reuters, no injuries were reported.

WHO IS IN? WHO IS OUT?
MOSENERGO ACTING DIRECTOR ASSUMES THE POST (24 September)
Arkady Yevstafyev, a newly appointed acting general director of Mosenergo, a Moscow energy grid, conducted his first session with Mosenergo officials on 24 September. According to a source in the public-relations department of Unified Energy Systems, the central office of Mosenergo in Moscow is functioning normally.

WHAT'S UP? WHAT'S DOWN?
EXPERT 200 RATING RESULTS (24 September)
Expert RA rating agency prepared the seventh issue of its Expert 200 rating of Russia's major companies. Gazprom, LUKoil, and Unified Energy Systems became leaders in sales volumes. The list of companies with the highest capitalization was headed by Gazprom, Surgutneftegaz, and LUKoil. Sibur, Borets, and the Kamensk-Uralsky Metal Factory are the top three companies in terms of growth. The results of the rating suggest that large businesses make up the backbone of the Russian economy. Two-hundred major enterprises account for over half of Russia's industrial production. Natural resource companies remain the leaders of the economy. Last year was the year of the oil and gas industry, as 80 percent of the top 10 companies operate in the oil and gas sectors. With over 75 percent of the total sales volume, export-oriented enterprises play the most important role in the Russian economy, according to RosBusiness Consulting.

PROFILE
VLADIMIR BRYNTSALOV
Pharmaceutical tycoon and Russian State Duma Deputy Vladimir Bryntsalov has developed a controversial reputation in the Russian business and political arena. His name surfaced in a scandal in September when the Health Ministry suspended Bryntsalov's license to produce Russia's most popular heart medication, hawthorn-berry tincture, known for its low price and high alcohol content. The company had its license suspended because it deviated from the mixture's recipe and technology for its production, according to Deputy Health Minister Anton Katlinskii. Specifically, the minister said, the company produced a liquid with a 75 percent alcohol content -- rather than a medication. Pharmexpert's medical-research center says that hawthorn tincture accounts for more than 10 percent of the company's output. Tincture sales netted the company $6.6 million last year and $4.2 million in the first quarter of 2001. Enjoying the high profits, Bryntsalov chose to ignore the statement of the Health Ministry, and his company continues to produce the controversial medication, "Vedomosti" reported on 7 September.

Earlier this year, Bryntsalov made headlines when he headbutted Communist Party Deputy Georgii Tikhonov during a session of the Russian State Duma. In an interview with the Russian magazine "Ogonek," Bryntsalov said, "The Communists always impede the work of the Duma." Some of them, he believes, should be institutionalized instead of working in the Duma. Commenting on the incident, Bryntsalov said that Tikhonov was standing in his way. "I told him [Tikhonov] to step aside, but he pushed me!... What could I do? I showed a bright example to the deputies! The Communists should be beaten!" Bryntsalov said he could have used his fists, but he wanted to show that he is "a peaceful man." "I knew it would be on TV. The Communists should know that the entrepreneurs can defend themselves. I showed them [the Communists] that people are with us. Let them shut up and behave themselves. We cannot stand them [the Communists] any longer." Despite his uncontrolled temperament, Bryntsalov was one of the presidential candidates in 1996. In the elections, however, he finished last.

The 1996 presidential candidate, Duma deputy, and head of the Bryntsalov company was born into the family of a plant worker in the town of Cherkesk, Stavropol Region, in 1946. In 1969, Bryntsalov graduated with a degree as a mining engineer but instead chose an administrative career. According to polit.ru, Bryntsalov could not resist "the temptations of the administrative positions" and, in 1979, his membership in the Communist Party of the Soviet Union was permanently revoked for his "minor bourgeois attitude." In 1987, Bryntsalov registered a company, Little Bee, producing honey and some medications. In the same year, he and three pharmaceutical plants established the Association of Moscow Medication Producers. In 1990, the association was renamed the Ferane company and became a purely commercial enterprise. Bryntsalov became the commercial director of the company. Some say he became rich during the privatization years, when he reportedly bought company employees' privatization checks for peanuts. In 1993, he became the president of Ferane with a 90 percent stake under his control. Others claim he is nothing more than a "bootlegger," selling alcohol without a liquor license.

Bryntsalov's political career was less successful than his business one. In 1993, he ran for a Duma position and lost. He then succeeded in 1995 as a deputy from Ivan Rybkin's faction. In 1996, Bryntsalov declared himself an independent without affiliation to any faction. As a Duma deputy, Bryntsalov was lobbying the interests of the Russian pharmaceutical industry, often at the expense of foreign pharmaceutical companies and their interests on the Russian market. His deputy's mandate did not spare him trouble, including with the tax agencies. Moreover, Bryntsalov's relations with Moscow Mayor Yuri Luzhkov became tense over the activity of Bryntsalov's company in Moscow. As a result, Bryntsalov transferred his assets to the Karachaevo-Cherkessia Region and re-registered his company Ferane under the name Bryntsalov. The company started producing Bryntsalovka vodka with Bryntsalov's picture on the bottles.

From 1996 to 1997, Bryntsalov maintained his "notoriety" through high-profile scandals in the Duma and by distributing his company's medications for impotence among Duma deputies. In 1996, he called himself "the main Russian pharmacist." As a true "new Russian," he enjoys "good hunting, gourmet food, and a beautiful wife." Living an opulent lifestyle with the former Miss Russia, he has been a constant source of gossip and rumors. Bryntsalov has not announced whether he might run again for president. However, as polit.ru jokes on its website, with the face of a presidential candidate, Bryntsalovka vodka is very popular in Russia. At least Bryntsalov can enjoy commercial popularity of the kind he failed to find in politics -- at least among his constituency. (Next week: How Bryntsalov built Ferane into a Russian business powerhouse.)

IN FOCUS
SISTEMA RULES MOSCOW ECONOMY
Russian financial and industrial group Sistema, which holds stakes in major Russian telecommunications companies, has signed a $10 million loan deal with Dresdner Bank of Luxembourg, Reuters reported in September. Olga Besterova, a spokeswoman for Sistema, said, "The funds will be used for implementation of the company's current projects. It is the first loan [from Dresdner], we are now in talks on next steps." She did not provide further details. According Reuters, Sistema is a major shareholder in Russia's biggest cellular operator, Mobile TeleSystems (MTS), and Moscow City Telephone Network (MGTS). For many companies, a $10 million loan would be a major step promoting development and growth. For Sistema, which is used to big numbers, it is quite common.

According to the Russian information agency Stringer, since 1992 when Yuri Luzhkov became mayor of Moscow, a strict system controlling all financial flows in the Russian capital has been in operation. Not a single ruble can be used and not a minor financial project can be implemented without this system's control. That system bears the same name -- "System," or in Russian, "Sistema." Sistema was first created to finance commercial projects in the field of information and telecommunications. Today, it controls the entire economy in Moscow. Sistema controls profitable entities in fields ranging from gas trading to advertising on buildings.

The founding father of Sistema, Vladimir Evtushenkov, started his commercial activities in 1990 when he was head of the technical department at the Moscow City Administration. With the Moscow Scientific and Technical Committee (MSTC), he started a joint U.S.-Russian company, AMRU-Star. In 1991, he became head of MSTC and opened his first private company, Region. Later, when Sistema was created, Region was turned into Sistema's information and analytical center, and at the same time its security service. Today, Region provides protection, "krysha," for former GRU and KGB agents. It is headed by Vagif Huseinov, a former head of the Azerbaijan Security Service. One of the more notorious "consultants" to Sistema is Vladimir Kryuchkov, a former KGB chief who organized the failed coup attempt against Mikhail Gorbachev that eventually unraveled the Soviet Union.

Evtushenkov's next move was to capture the most lucrative market in Moscow: construction. With his U.S. partners, Evtushenkov established a company, Ordynka, to remodel buildings (hotels, restaurants, and offices) in downtown Moscow. The business was only average -- still, it sufficed for buying bread and caviar for the company's employees. Gradually, Evtushenkov was expected to turn into a major Moscow realtor. However, he hatched a scheme to turn himself into the unofficial king of Moscow. During the first years of privatization in Russia, when oil companies and metallurgical giants were being privatized, Evtushenkov privatized an entire department of the Moscow administration -- with all its bureaucracy and all its power. In 1993, he became a major shareholder of MSTC and turned it into a joint-stock company. MSTC immediately became an intermediary between the Moscow city government and commercial companies. This allowed money from local government to go directly to private companies.

Millions have passed through Sistema since then, turning it into a conglomerate of holdings and sub-holdings. Sistema has spread its influence throughout the entire economy of Moscow. Currently, over 50 major companies constitute Sistema. In fact, Sistema operates as a super-holding company. Years ago, when a number of people thought up a name for the company, they probably had in mind a systemic approach that would allow the seizure of state enterprises. Thus the name "Sistema." However, if the internal structure of the company were to be expressed in its name, it might well have been called "Cosa Nostra" after the Italian Mafia. Indeed, despite a bureaucratic division of the super-holding company into departments, the real structure of Sistema is based not on professional hierarchy, but on personal connections and responsibilities of its associates toward each other.

Sistema's goal is to make profits for a small group of people blessed by the mayor of Moscow. In return, these most influential leaders of the holding company defend the interests of Sistema through an inner council. Rumors have it that the idea of Sistema's "council" came from Evtushenkov himself, who is fascinated by conspiracy theories and secret societies. He even established a magazine, "Magisterium," which is occupied with Masonic issues and history, believing they rule the world.

The core of this "inner council" can be found among the founding members of the Moscow Bank of Reconstruction and Development. This list includes: Vladimir Evtushenkov, Aleksandr Leiviman, Vitalii Gurfinkel, Anatolii Yarochkin, Stanislav Arbiev, Nikolai Mikhailov, Valerii Kryukov, and Aleksandr Goncharov. These members are responsible for the original organizing company that founded Sistema. Since 1997, the bank has been replaced by the Society of Art Support. The leadership of the Society of Art Support has remained faithful to the secretive ways of the Masonic code. They never make public statements, and its board of directors never convenes in Russia. To promote major investment projects, new companies are formed to start with a clean slate and to confuse business competitors. Sometimes, it is impossible to determine the responsibilities of board members. Even publicly accessible business and financial data at the Moscow registration chamber is often confusing and controversial. Some experts even suggest that Sistema today is the real power behind Putin's throne. The controversy no doubt will continue.

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