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Business Watch: September 7, 2001


7 September 2001, Volume 1, Number 9
OIL & GAS
TRANSNEFT TO BOOST OIL EXPORTS (3 September)
Russian pipeline monopoly Transneft's director, Semyon Vainshtok, said the company has raised export capacity at the port of Novorossiisk and has plans to start exporting to Iran. Novorossiisk raised its annual export capacity to 44 million tons from 32 million tons at the beginning of 1999 and from 38 million tons at the end of 2000, Reuters reported. Transneft will continue to maximize oil exports, which already exceeded Soviet-era exports by 20 million tons in 2000 when they hit 144 million tons, saying it was aiming for exports of 170-190 million tons by 2005. Transneft is reviewing the results from tests of a new export route to Iran that would involve oil producers from Kazakhstan, Uzbekistan, and Turkmenistan. The oil will run through an existing pipeline from Omsk in Russia to Pavlodar and Chimkent in Kazakhstan, then through Uzbek territory to Chardzhou in Turkmenistan. Vainshtok noted the need for technical changes on Uzbekistan's territory. He said, "Iran is interested in crude supplies to its northern refineries and is ready to swap the same volumes in the Gulf."

SIBUR-TECHNIMONT SIGN CONSTRUCTION CONTRACT (5 September)
The Siberian-Ural oil, gas, and chemical company (SIBUR) and Italian Technimont have signed a contract for the construction of a polyethylene producing factory to be located in the Nizhnii Novgorod region. The factory will produce high-density and low-pressure polyethylene. According to SIBUR, the contract totals 89 million euros. The factory will begin producing 120,000 tons of polyethylene annually and increase its volume to 240,000, RosBusiness Consulting reported. Basell, a joint venture of the BASF and Shell companies, is the licensor of the contract. The main technological feature of the project is the possibility of a separate coloring of polyethylene. The factory is planned to be operational in 30 months.

SIBNEFT-SIBIR FORM JOINT VENTURE (4 September)
Russian groups Sibneft and Sibir Energy announced the creation of a new joint venture to exploit the Yuzhno-Priobskoe and Palianovskoe oil fields in West Siberia, owned by Sibir Energy. Previously, it was announced that the production licenses for these deposits would be handed over to Moscow oil company (MNK), 50 percent of which was transferred to Sibir Energy a month ago following a decision from the MNK supervisory board, the "Financial Times" reported. MNK's management clearly recognizes that the company has no financial resources to start commercial production at the sites by itself, it seems.

BUSINESS ALERT
NORILSK AND OUTOKUMPU SIGN MODERNIZATION CONTRACT (3 September)
Russian metals giant Norilsk Nickel and Finnish metals group Outokumpu have signed a contract for the building of an ore-enrichment plant and the modernization of another plant in Talnakh. Norilsk said the deal is worth $130 million. Outokumpu estimated the value of the projected work and construction at $230-$250 million, but a final figure will become clear when the construction project is ready, within the next seven months. A Norilsk spokesman said, "We expect that the most up-to-date equipment will be installed at the plant, which will permit an increase in productivity by three- or fourfold, and to cut the costs of ore enrichment by the same numbers." The new plant in Norilsk will be commissioned in 2004.

ELECTROSVYAZ LAUNCHES ADR (4 September)
JP Morgan announced that Electrosvyaz of the Novosibirsk Region, Russia's 11th-largest regional telecom provider, has launched a sponsored American Depositary Receipt (ADR) facility traded on the OTC market. The issuer is an operating unit of Svyazinvest, the holding company for Russia's regional telecommunications network. Electrosvyaz of the Novosibirsk Region is the near-monopoly provider of fixed-line local and long-distance telecommunications services in Russia's Novosibirsk region. With 592,000 access lines, its penetration rate is 20 telephones per 100 persons. The company provides transmission of radio and TV signals, telex, and telegraph, and has stakes in numerous telecom ventures, including cellular operator Siberia Cellular Systems-900, Novosibirsk Cellular Telecom-450, and paging operator Sibton. For the fiscal year ended December 2000, revenues were $36.5 million (IAS) and net profits were $510,000 (IAS).

ALROSA ISSUES PROFIT WARNING (6 September)
Diamond monopoly Alrosa's net profits for 2001 will shrink by 34.3 percent year-on-year to 6.519 billion rubles ($220 million), Interfax reported on 6 September. Alrosa blamed the unscheduled cost of rehabilitating the flood-ravaged city of Lensk in Yakutia, where the company is based, for the drop in profits. Alrosa had originally projected higher net profits than in 2000, but it had to adjust its figures in August. The company is anticipating a pretax profit of 10.909 billion rubles and is expecting to pay 4.39 billion rubles in taxes. Alrosa has budgeted 3 billion rubles for the cleanup operation in Lensk, where it will build 1,200 new apartments and a new embankment. Alrosa mined $1.623 billion in diamonds in 2000. Net profits came to 9.93 billion rubles.

RUSSIAN BUSINESS ABROAD
LUKOIL SUBSIDIARY TARGETS BITECH (31 August)
LUKoil Overseas Holding Limited (LUKoil Overseas) announced that its indirect wholly owned subsidiary, LUKoil Overseas Canada Ltd, acquired 79.6 percent of the common shares of Bitech Petroleum Corporation (Bitech) and extended the expiry of the offer to 11 September 2001, according to a company statement. LUKoil Overseas extended its offer in order to provide the remaining Bitech shareholders with additional time to assess and accept the offer, it said. The basis of the offer is (Cdn.) $1.55 cash for each Bitech share. Bitech's board of directors unanimously recommended that its shareholders accept the offer. Peters & Co. Limited are acting as financial adviser to the board of Bitech, and provided a fairness opinion that the consideration to be received by the shareholders of Bitech under the offer is fair, from a financial point of view, to the shareholders of Bitech. Bitech is a Canadian oil exploration and production company, with operations predominantly within the Republic of Komi in the Russian Federation.

ECONOMIC NEWS & BUSINESS STATISTICS
RUSSIAN TRADE FIGURES (5 September)
Trade turnover between Russia and Ukraine grew by 11 percent in the first seven months of 2001, reaching $5.5 billion. Russian exports to Ukraine dropped by 3 percent, while imports increased by 36 percent, the State Customs Committee said. Belarus with $5.4 billion (a rise of 6 percent) ranks second in terms of trade turnover with Russia. Russian exports to Belarus in the first seven months of 2001 increased by 2 percent and imports from Belarus grew by 11 percent. Russia's trade with the Baltic states is developing by a similar scenario, ITAR-TASS reported. Russian exports to Kazakhstan in the first seven months of this year increased by 41 percent, while imports from Kazakhstan rose by only 7 percent.

MOSCOW SEEKS 300M EURO LOAN (4 September)
The City of Moscow plans to take out a 300 million euro loan ($273.2 million) by early October to refinance debt and fund investment programs. "If the situation is favorable, if market conditions suit us, we will think about attracting these funds at the end of September or in early October," Moscow Financial Agency General Director Mikhail Kalinushkin told Reuters. He declined to specify what rates would be seen as favorable. Moscow's municipal-debt committee said it had applied to the Central Bank for a license to get a three-year loan of up to 300 million euros. Moscow has already obtained Finance Ministry permission to take the loan. The loan would be granted by Frankfurt-based BHF Bank AG and financed by the issue of Loan Participation Notes by Moscow, with ING Barings and UBS Warburg joint lead managers of the offering and placement of the notes. The City of Moscow has this year repaid Eurobonds of 500 million marks ($232.9 million) and 400 billion Italian lira ($187.5 million). Kalinushkin said the city had accumulated enough funds to repay the remainder of foreign debt falling due this year. Moscow has to repay a $105 million remainder on a $295 million loan from Credit Suisse First Boston, which matures this year.

PUTIN PREDICTS 2001 GDP GROWTH OF 6 PERCENT (3 September)
Russian President Vladimir Putin said Russia's economy was continuing to expand faster than at any time over the past 30 years. He predicted that gross domestic product (GDP) would grow by 6 percent this year. Putin, speaking to Finnish businessmen during a state visit, said cooperation between the two nations was being helped by the former Soviet state's economic health. Previous forecasts for this year's GDP growth totaled only 5 percent to 5.5 percent, although the budget had included a target of 4 percent. Growth last year was a post-Soviet record of 8.3 percent, fueled by high prices for oil. The official growth forecast for 2002 in the 2002 draft budget is 4.3 percent. Putin has launched an ambitious raft of reforms to get his country on a steady growth track after years of economic crisis following the collapse of the Soviet Union. The reforms have included tax cuts and new legislation aimed at encouraging investment. Putin said tax collection had increased 30 percent since the start of the year, Reuters reported.

POLITICAL ECONOMY
PUTIN SUPPORTS FREE TRADE OF GAZPROM SHARES (6 September)
Russian President Vladimir Putin has tentatively approved a plan that would liberalize the trading of Gazprom shares. The president did not immediately lift the current 20 percent ceiling on foreign ownership in the company. Dmitry Medvedev, Putin's first deputy chief of staff in charge of preparing the reform, said, "The government and the presidential administration advocate a cautious approach and believe that a reasonable conservatism is necessary to carry out the reform in a reasonable time and with the best economic result." The plan consists of three consecutive stages of liberalization, which may result in granting foreigners equal rights with Russians in buying Gazprom shares as early as 2002, AP reported. Under the current system, foreigners are barred from owning Gazprom stock directly and allowed only to buy and sell American Depositary Receipts (ADRs), which are traded in London at a hefty premium to local stock. Foreign investors officially hold 11.5 percent of Gazprom. Many market analysts believe that foreign investors already own more than 20 percent of Gazprom, as a result of a series of covert buying operations before the 1997 presidential decree setting the limitations. Medvedev said the government hadn't yet made up its mind on proposals to split Gazprom's production and transportation network. Another major issue still to be tackled is the need to increase domestic gas prices, which are now about 10 percent of the world price.

WHO IS IN? WHO IS OUT?
GAZPROM STRUCTURAL CHANGES (3 September)
At a Gazprom business meeting on 3 September, Executive Board Chairman Aleksei Miller announced structural changes in the company's management, a representative of the Gazprom Press Service told RosBusiness Consulting. Petr Rodionov was appointed first deputy chairman of the executive board, responsible for economic and financial issues. Sergei Lukash was appointed deputy chairman of the executive board for administrative issues. Yurii Lvov was appointed chairman of the Gazprombank executive board at an emergency meeting of the participants of Gazprombank. Mikhail Akselrod was appointed head of the Department of Investments and Construction. Aleksandr Dybal was appointed head of the Information Policy Department. Natalya Selivanova was appointed press secretary of the chairman of the Gazprom executive board and deputy head of the Information Policy Department. Yurii Komarov, a member of the Gazprom executive board, will be responsible for supervising the export policy for non-CIS countries, the CIS, and the Baltic countries. Additionally, the instruction on the procedure for conclusion, registration, and control of contracts in Gazprom was introduced.

SKLYAR APPOINTED GENERAL DIRECTOR OF RTRN (3 September)
Russian President Vladimir Putin has signed a decree appointing Gennadii Sklyar to be the general director of the Russian Television and Radio Network (RTRN), Deputy Press Minister Mikhail Seslavinskii told RIA Novosti on 3 September. According to Seslavinskii, RTRN will run Russian regional television and radio centers. Its Charter is expected to be approved shortly. Smi.ru speculates that RTRN is being formed to unite all Russian tele and radio centers under the jurisdiction of a new structure, removing them from the jurisdiction of the Russian State Television and Radio Committee. The reorganization is related to the conflict between two ministries -- the Press Ministry and the Communications Ministry. Both wanted to fully control Russian television and radio centers. The presidential order, however, did not specify who will control RTRN. Prior to this appointment, Sklyar was the head of the Kaluga region representative office at the Russian government. He ran in the 1995 parliamentary election. In 1996 during the [gubernatorial] election in the Kaluga region, he was the head of Valerii Sudarenkov's electoral headquarters. Sklyar's publications regularly appeared in "Pravda," and "Soviet Russia." Since 1992, he has been a member of the "Leftist Newspaper" editorial board. The Press Ministry and Communications Ministry refuse to comment on Sklyar's appointment. The ministries underline that, "This is the president's choice."

AEROFLOT APPOINTS NEW BOARD OF DIRECTORS (6 September)
Russian airline Aeroflot elected a new board of directors at an extraordinary general meeting of shareholders. The new board includes five state representatives: First Deputy Property Minister Aleksandr Braverman; Economic Development and Trade Minister German Gref; Deputy Director of the Federal Security Service (FSB) Yurii Zaostrovtsev; Deputy Finance Minister Vladimir Chernukhin; and Transport Minister Sergei Frank. In addition, the board includes the executive director of Profit House, Aleksandr Nemtsov, the director general of the Prospekt investment company Mikhail Vinchel, and others. The extraordinary meeting was initiated by Carrol Trading company, which owns more than 10 percent of Aeroflot. The state holds a 51.17 percent stake in the airline, while 13.34 percent belongs to individual investors, RosBusiness Consulting reported.

WHAT'S UP? WHAT'S DOWN?
MOODY'S RAISES RUSSIAN EUROBOND RATING (5 September)
Moody's Investors Service on 5 September raised the ratings of Russia's outstanding Eurobonds to "B2" from "B3," praising the government's tax-reform effort and revising the ratings outlook to "positive" from "stable." "The Russian Federation's recent economic performance and tax reforms have generated twin surpluses (current account and budget) and large foreign currency reserves," Moody's said in a statement. "In combination with some debt relief, these factors have made the country's capacity to service its debt much greater," the ratings agency said. But significant uncertainties exist, Moody's added, as capital flight continues unabated, little enterprise restructuring has occurred, and banking-system reform remains to be addressed. Moody's now rates Russia eurobonds at the same level that it rates the foreign bonds issued by Venezuela. The rating is one notch lower than Brazil's "B1" and two notches higher than Argentina's "Caa1" on the Moody's scale. Standard & Poor's, meanwhile, rates Russia's Eurobonds at "B," which is equal, on S&P's scale, to Moody's "B2."

PROFILE
PUTIN-BEREZOVSKII UPDATE: AT WAR OR AT PEACE? (6 September)
Russian self-exiled tycoon Boris Berezovskii claims he was the one who raised Russian President Vladimir Putin to political heights, created and promoted the political party Unity, gave Russian media actual freedom and independence, and devoted his life to restoring democracy in Russia. Unfortunately for Berezovskii, Putin failed to meet his expectations and in fact has arguably been strangling democracy in Russia since taking office. This reality was made public after the conflict between Putin and Berezovskii could no longer be contained within the Kremlin walls. A version of this conflict, how it evolved, and the current status, was made public on the website, gazeta.ru.

Relations between Putin and Berezovskii relations, at first dynamic, proved short-lived. Berezovskii's role changed from a leading idea man within Yeltsin's presidential team to silent opposition against the ruling party and Putin himself. From statements like, "Putin is the president with whom I could live in Russia," he shifted to predictions about Putin's political sunset. In numerous interviews given from abroad, Berezovskii predicted that Putin will not last even one presidential term. Putin does not rule the country, Berezovskii declared. Instead, he floats between political movements, trying to stay on top. Berezovskii concluded that Putin underestimated the scale of changes that occurred during the Yeltsin years. Putin did not believe that society was ready for democracy. "He told me, 'Boris, they are not ready.' But I think otherwise. In the past 10 years, millions of people have become independent," Berezovskii stated.

Creative and full of ideas, Berezovskii became an expert in original public relations strategies in 1996, when, due to the oligarchs' joint efforts, former Russian President Boris Yeltsin was reelected. "Society wanted [Communist Party leader Gennadii] Zyuganov. It did not want Yeltsin," Berezovskii said, recalling the 1996 presidential campaign. In the parliamentary elections of 1999, society wanted the Communists, but received Unity, which was created and financed by Berezovskii. Berezovskii claims that he even made up a new ideology and symbols for Russia. According to the oligarch, the symbol of the bear precisely reflects the Russian spirit. However, these hey days are now over. Today, Berezovskii complains that despite his valuable contributions to Putin's presidency, he has ended up in exile, hiding from his "old Kremlin friends." He resigned himself to self-exile in France because he would "rather be a political immigrant, than a political prisoner."

Berezovskii became an outcast when Putin began to implement his pre-election pledge to "distance oligarchs from power." One month after his inauguration, Vladimir Gusinskii, one of the oligarchs and then head of Media Most, was arrested. Putin had a personal animus against Gusinskii, who became the first high-profile target for his anti-oligarch campaign. Berezovskii condemned the move, saying that the president was behind it. Shortly after the arrest, Berezovskii published an open letter to the president strongly criticizing Putin's draft federal reforms. Apparently, the president responded because Berezovskii's next step was the transfer of 49 percent of the shares in his ORT television network to journalists. He wrote back to Putin, "Last week, a bigwig from your administration sent me an ultimatum to transfer my ORT shares to state control or to follow Gusinskii, I believe, to Butyrka prison." Berezovskii believes that Putin was highly displeased with ORT's coverage of the "Kursk" submarine accident in August 2000. In an interview with "The Independent" cited by gazeta.ru, Berezovskii accused Putin of avoiding an investigation over speculation that Moscow apartment bombings in 1999 had been staged by the Federal Security Service (FSB). Berezovskii also accused Putin of removing Aleksandr Rutskoi, once governor of the Kursk region, from running for reelection. "The president was furious when he found out that Rutskoi arrived first in Vidyaevo after the sub ["Kursk"] sank. I saw it," Berezovskii said.

Berezovskii remains in his residence in France. Gazeta.ru concludes that he is planning the creation of a powerful opposition to Putin and his government. "Versiya" reports that Berezovskii is using his media outlets to attack officials and destabilize the political situation in St. Petersburg. If he succeeds, the magazine says, he will "attack" Moscow. Oleg Lurie of "Vremya Novostei," however, introduces another opinion. Responding to readers' questions on 3 September, he says that all criminal cases launched earlier against Berezovskii and his businesses are being closed in a rush, ensuring Berezovskii's safety in Russia and abroad. Lurie says that for the past six months, Berezovskii has secretly visited Moscow and St. Petersburg three times. None of his visits was covered in the press. The FSB and the Prosecutor General's Office did not show any interest in troubling, questioning, or arresting this wanted oligarch. How is that possible? There is only one explanation, Lurie believes. He speculates there must be a "peace agreement" and a "security guarantee." The only person who could give these guaranties to Berezovskii is the president. Thus, Lurie concludes, there is no need to worry about Berezovskii. He will return to Russia with his political influence and millions in assets intact. But these versions are far from the final version of events concerning the future of Berezovskii.

IN FOCUS
NEW EVIDENCE ADDS TO AN OLD SCANDAL (5 September)
A forgotten scandal about interrupted gas supplies from Russia to Georgia last winter received new impetus when the Russian Interior Ministry's investigation committee launched a criminal case against Inneftegazstroi, a Russian gas company. Inneftegazstroi is accused of smuggling gas into Georgia. According to investigators, Inneftegazstroi received about $10 million in illegal profits.

The Russian daily "Vremya Novostei" reported that the activities of Inneftegazstroi were never widely covered. The company was established by a firm called "New Kremlin." Initially, Inneftegazstroi was headed by Georgii Umarov, then head of the fund "Restoring the Chechen Republic." Later, the company's leadership was transferred to two businessmen by the names of Lushnikov and Sakhartsev. Over the years, Inneftegazstroi remained in the backyard on the domestic or international energy market. Suddenly, it came to the forefront of the industry when the company signed a major gas-delivery contract with U.S.-based AES, operating in Georgia.

For a while, Inneftegazstroi worked in strict compliance with the contract terms. On 1 January, however, gas supplies to Georgia were suddenly stopped without any of the prior notification requirements of the contract. The situation evolved into an energy crisis, bringing Georgia to the brink of political and social turmoil. Georgian President Eduard Shevardnadze condemned the situation, saying it had been artificially created, and called on his officials to settle the problem with Russian Prime Minister Mikhail Kasyanov. Shevardnadze also stated that 60 percent of Inneftegazstroi belonged to Russian gas giant Gazprom.

Several days later, gas supplies to Georgia were restored and the world community condemned Russia for politicizing the issue by punishing Georgia for its pro-Western stance. Inneftegazstroi stated it had been forced to halt gas supplies by the Russian State Customs Committee for "dumping" gas at less than market rates. As the Russian press reported during the gas crisis, the committee found some of the activities of Inneftegazstroi to be illegal. Soon, another interesting fact was made public: According to Inneftegazstroi documents, the price for gas supplies to AES was an unbelievably low $41 per 1,000 cubic meters. At the same time, a Russian company Itera was shipping gas to Georgia at a price of $53 per 1,000 cubic meters. For the sake of comparison, Russia is delivering gas to neighboring Ukraine at twice that price.

"Vremya Novostei" speculates that the Russian "dealers" were acting together with Georgian officials, deliberately lowering the price for gas supplies in the company's official documents. This supposedly allowed the concealing of huge incomes in hard currency. Afterwards, the dirty money was transferred to foreign bank accounts. Preliminary results of the investigation show that Inneftegazstroi officials earned over $10 million. A criminal case under Article 188 (for smuggling) of the Russian Criminal Code has been launched. Inneftegazstroi top officials Lushnikov and Sakhartsev are expected to be summoned for questioning.

On 4 September, a journalist from "Vremya Novostei" tried to reach Inneftegazstroi's officials for an interview. He did not succeed -- all Inneftegazstroi offices had been shut down several months. When asked about the relationship with Inneftegazstroi, Gazprom's press service stated that, "According to the company's annual report issued 1 January 2001, Inneftegazstroi was not listed among Gazprom branch companies or subsidiaries." On 6 September, Inneftegazstroi promised to pay off its debts to AES-Mtkvari with natural-gas supplies to power stations 9 and 10 in Tbilisi. Now, Inneftegazstroi assures William O'Reilly, director of AES-Mtkvari, that there will be no problems repaying the debt by bringing gas supplies to Georgia.

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