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Business Watch: November 13, 2001


13 November 2001, Volume 1, Number 18
OIL & GAS
BOUYGUES OFFSHORE WINS CPC CONTRACTS (6 November)
Bouygues Offshore has been awarded project maintenance contracts in Russia and Kazakhstan by the Caspian Pipeline Consortium (CPC), Business Wire reported. For a total amount of $60 million, the contracts include the maintenance and the emergency response services for a five-year period. The contract will cover the CPC terminal on the Black Sea, and the 1,500-kilometer pipeline connecting the Tengiz field (Kazakhstan) on the Caspian Sea side to the CPC terminal. In April 1999, Bouygues Offshore was awarded the contract for the construction of the 750-kilometer pipeline in Russia. Commenting on the project, Bouygues Offshore Chairman Herve Le Bouc said, "This new success follows on from turnkey contracts won in 1999 to build the CPC terminal and 750-kilometer pipeline. It reflects Bouygues Offshore's strategy of offering customers solutions across the value chain, from engineering to maintenance. These new contracts, in the promising areas of [the] Caspian Sea and Russia, are helping to drive the worldwide expansion of Bouygues Offshore's maintenance business." (TSK)

SIBNEFT SEES $250 MILLION EUROBOND DEAL (6 November)
Russia's sixth largest oil producer, Sibneft, said it would go ahead with a planned $250 million eurobond issue in November although all other Russian firms have postponed such launches until 2002, Reuters reported. Sibneft said its determination had been bolstered after the international rating agency, Moody's, assigned a B1 rating to the proposed three-year notes, rating them higher than Russia's sovereign ceiling. "We hope to close the deal by the end of November. If there is great interest in our notes, the volume can be raised from the planned $250 million," the head of corporate finance for Sibneft, Richard Creitzman, stated. Meanwhile, LUKoil, Tyumen Oil Company (TNK), and Gazprom have postponed planned debt issues this year, saying they wanted to wait for more favorable market conditions. Creitzman said there was very little chance Sibneft would change its plans as the company will start a road show to present the company to investors next week in Vienna. Creitzman, hired by Sibneft from international energy giant Enron, said that he saw the current market conditions for a bond issue as favorable. "We have seen that the spread on Russian debt has narrowed considerably over the last six months," he said. After the completion of the road show, Sibneft plans to decide on pricing its bonds. (TSK)

BUSINESS ALERT
LEITCH WINS CENTER TV CONTRACT (1 November)
Leitch Technology Corporation has won a multimillion-dollar contract to provide Professional & Broadcast Digital Systems (PBDS), a systems integration company, with server and routing technology to support a fully integrated television newsroom in Moscow for TV-Tsentr. The new facility, built around Leitch's extensive VR(R) product range, will include 11 NEWSFlash-II (TM) editing solutions and will be based on a dual-fiber channel loop system offering 30 channels of ingest or playout, PR Newswire reported. Tom Gittens, UK sales manager at Leitch, said, "Our high server bandwidth and news-specific editing capabilities, together with simultaneous shared access, mean that [TV-Tsentr] will see workflow improvements that could not have been attained with other suppliers' equipment." The digital newsroom, further evidence of strong investment emerging within Russia, will be the first in the country with a media-asset management system and one of the first anywhere to have an integrated archive accessible across all operational areas. TV-Tsentr is currently the leading TV network in Russia, covering more than half of the Russian territory, plus some Commonwealth of Independent States and the Baltic countries. (JMR)

ROSTELEKOM SEES DOUBLE NET PROFIT IN 2001 (5 November)
Russian long-distance carrier Rostelekom sees its annual net profit doubling to 2-2.5 billion rubles as compared to a 1.03 billion-ruble net profit posted in 2000, Reuters reported. However, analysts warn that the Russian Accounting Standards (RAS) did not include the inflation rate and masked a decline in the company's revenues over the first nine months. Rostelekom reported a 1.8 billion-ruble RAS net profit for the first nine months of 2001, double the figure for the same period of 2000. Renaissance Capital analyst Andrei Braginsky said Russian investors would see the headline figures as positive but added the nine-month numbers hid a drop in revenues that would show up in Rostelekom's international-standard accounts (IAS) later. "The Russian standard figures show a trend...The trend is that the business is growing slower than inflation and the rate of cost increases is higher." Rostelekom has been plagued by uncertainty about its role in the sector when it loses its monopoly in a few years time and its stock fell to all time lows in recent months. Analysts have pinned hopes for a mid-term turnaround on a new management team and gradual increases in settlement rates with local operators. According to Rostelekom chief financial officer Vladimir Androsik, a recently approved increase in the tariff to Rostelekom by local operators is expected to increase Rostelekom's revenues by 4 to 5 percent in 2002. (TSK)

RUSSIA BOEING TO COOPERATE IN AEROSPACE INDUSTRY (3 November)
Former U.S. Deputy Secretary of State Thomas Pickering said that Boeing considers aerospace cooperation with Russia a priority, ITAR-TASS reported. Speaking at the 5th annual U.S.-Russian investment symposium, Pickering said that Boeing is interested in continuing the launching of satellites aboard Proton carriers. Within 10 years, Russia and the U.S. plan to carry out 12 satellite launches. Boeing also continues to study prospects for launching a satellite aboard the Zenit missile, Pickering said. He believes that the construction of Boeing servicing centers in Russia is one of the perspective projects. Boeing has 25 such centers in Russia. Currently, Russian airlines spent $100 million per year to service their technique in Europe, Pickering stressed. He believes that in 7 to 10 years Russia will be unable to build competitive aircraft to carry out international flights. Pickering did not rule out that Boeing will take part in a project to construct a modern airliner in Russia. (TSK)

RUSSIA NEEDS $50 BILLION TO REFORM POWER SECTOR (4 November)
Russia needs $50 billion in investment over the next decade to reform its power industry, Yakov Urinson, the deputy chairman of Russia's Unified Energy Systems (UES), stated at the 5th annual U.S.-Russian investment symposium. "The Russian government has no such money; neither power producers in Russia have it," he was quoted by ITAR-TASS as saying. Urinson called on foreign businessmen to invest in reforming Russia's power industry. According to Urinson, conditions for foreign participation in the development of the Russian power market will be "very luring" in the near future. "Even now investors can participate in small projects on upgrading operating facilities so as to participate in privatizing major power facilities in [the] future on the basis of accumulated experience," he noted. Urinson stated that his company is suggesting that interested investors participate in projects to update existing operating power plants or in the construction of new ones with investments of between $30-$450 million. (TSK)

RUSSIA'S MACROECONOMIC SITUATION FAVORABLE, FISCHER SAYS (3 November)
Russia achieved considerable progress at the macroeconomic level over the last 1.5 years, former IMF Deputy Managing Director Stanley Fischer said at the 5th annual U.S.-Russian investment symposium. However, such factors as oil prices and the 2002 budget based on the price of $23.5 per barrel of oil cause serious concern, ITAR-TASS quoted Fischer as saying. The oil price may go even lower and it is necessary to take it into account, he stressed. As a whole, the macroeconomic situation in Russia is very favorable, he added. Fischer said that if Moscow asks the IMF to provide aid, it will accept because Russia is a very disciplined debt payer. At the same time, it is unclear if Russia will need aid from international financial institutions in 2003 to 2004. Russia should do its best to increase foreign direct investments to reach $15 billion to $16 billion a year, Fischer pointed out. (TSK)

RUSSIAN BUSINESS ABROAD
RUSSIA TO MODERNIZE HUNGARIAN MIGs (1 November)
The Hungarian Defense Ministry and Russia's MIG corporation have signed an agreement to extend the life cycle of engines installed on Hungarian Air Force MIG-29 fighters made in Russia, ITAR-TASS reported. The MIG corporation will overhaul the fighters, provide spare parts, and carry out repairs. The planes' life cycle will be extended through 2005. After several months of debates, the Hungarian cabinet last February made a decision to drop the idea of fundamentally upgrading the MIG-29s. Hungarian Defense Minister Janos Szabo earlier signed a protocol of intent with Daimler-Chrysler Aerospace on upgrading the MIG fighters and adjusting them to NATO standards. The new protocol came under heavy criticism from the U.S. Hungary has also entered negotiations with Sweden on leasing 14 fighters for its air force. (JMR)

RUSSIA TO COOPERATE WITH EASTERN EUROPE ON NUCLEAR ENERGY (2 November)
Russian Nuclear Energy Minister Aleksandr Rumyantsev said cooperation with Eastern European countries in the nuclear energy field is likely. He said some East European countries, "having doing an analysis in this field, will probably make a choice in this cooperation in favor of Russia." Rumyantsev stressed that at present, the "nearest partner of Russia in this sphere is Ukraine," ITAR-TASS reported. He noted that Russia and Ukraine were on schedule to complete the building of Ukraine's Rovno and Khmelnitsk nuclear power plants. (JMR)

ZIL SETS UP FACTORY IN ASTANA (2 November)
The Moscow truck producer ZIL plans to set up an assembly factory in Astana, Moscow Mayor Yurii Luzhkov announced after a meeting with his counterpart from Astana. In addition, the officials secured an agreement on the construction of a railroad in Astana, RosBusiness Consulting reported. (JMR)

RUSSIA PROPOSES ENERGY PROJECTS TO MIDDLE EAST (6 November)
Participating in the 7th International Aerospace Show in Dubai, the Russian delegation offered several projects of energy sector upgrading to Middle-East countries, ITAR-TASS reported. Cooperation in the power industry holds much promise for promoting Russian high-tech in the Persian Gulf area, said Yuri Yeliseyev, general director of the Moscow-based aircraft engine manufacturer Salyut. According to Yeliseyev, the revenues from energy sector projects may exceed the revenues from weaponry trading over time. The Russian power-generating units based on gas-turbine aircraft engines are less expensive than their Western analogs, but they fully conform to the Western standards of quality, he said. The Salyut engine manufacturer can offer affordable schemes of modernizing the gas-turbine power units located in territories with a hot climate, Yeliseyev said. He noted that Iran has 70 power-generating units with an output capacity of 25 megawatts each. The modernization project will help the country get an equivalent of a 500-megawatt power plant. Projects of this type are possible in other countries of the Middle East, Yeliseyev said. (TSK)

ECONOMIC NEWS & BUSINESS STATISTICS
U.S. ALLOCATES $15 MILLION FOR KAZAKH BUSINESSES (2 November)
The U.S. has allocated $15 million in support of Kazakhstan's small and medium-sized businesses. U.S. Ambassador to Kazakhstan Larry Napper told ITAR-TASS that the U.S. government, through the Agency for International Development (USAID), has worked out and is implementing a comprehensive program. Napper said the program envisions assistance to Kazakhstan's entrepreneurs in broadening sales markets, in rendering services, and in ensuring a more favorable legislative and regulatory environment for the development of small and medium-sized businesses. The U.S. is to allocate $3 million every year under the five-year program. (JMR)

USAID ALLOCATES $5 MILLION TO THE GEORGIAN POOR (6 November)
USAID will allocate $5 million to Georgia as a part of its program to ensure enough energy supplies during the upcoming winter, Prime News Agency reported. Specifically, the program will cover energy expenses for poor people. A memorandum of understanding was signed on 6 November in Tbilisi by U.S. acting Ambassador to Georgia Philip Remler, director of the USAID Caucasus mission Michael Pharbman, the head of PA Consulting, Din White, and Georgian officials. (TSK)

UES REQUIRES $270 MILLION FOR DEVELOPMENT (6 November)
The development of the electricity network of the Unified Energy Systems (UES), Russia's national energy company, will require about 8 billion rubles ($270 million) in 2002, UES Deputy CEO Andrei Rappoport said. He stressed that a lot of the stations in the energy grid are still not connected to electricity transmission lines. According to RosBusiness Consulting, the total cost of the 2002 investment program is 26 billion rubles ($876 million), as compared to 11 billion rubles ($371 million) in 2001. (TSK)

POLITICAL ECONOMY
KAZAKH PARLIAMENT PASSES 2002 BUDGET (2 November)
Kazakhstan's parliament gave final approval to the 2002 budget, setting the deficit at 0.9 percent of gross domestic product. The budget, passed in its second and final reading, foresees income of 489 billion tenge ($3.302 billion) and expenditure of 516.3 billion tenge ($3.486 billion). The second reading was approved by the Mazhilis, the lower house of parliament, by 55 votes to one with one abstention, and by the upper house, the Senate, by 34 votes with none against. The bill now goes to President Nursultan Nazarbaev for his signature. (JMR)

PUTIN WORRIED OVER OIL PRICE FALL (5 November)
Russian President Putin has called on his government to propose further changes to the 2002 budget following the recent falls in oil prices, Reuters reported. "The government should react in the proper fashion to the recent changes and we have such a possibility," Putin was quoted as saying. Prices for the Urals blend, Russia's main export type, are fast heading for the $18.5 per barrel level set in the 2002 budget as the minimum expected. Further falls could wreck the government's financing plans. "What is happening on world markets should not leave us in confusion," Putin told his key ministers at a Kremlin meeting. "We foresaw this." He said amendments made to next year's budget had been correct, but Prime Minister Mikhail Kasyanov and Deputy Prime Minister Viktor Khristenko should propose further changes. The 2002 state budget is a landmark document as it foresees a surplus for the first time. The expected surplus is 1.63 percent of gross domestic product. (TSK)

WHO IS IN? WHO IS OUT?
TRANSNEFT PULLS OUT OF TRANSOIL (5 November)
Russian pipeline monopoly Transneft has decided to pull out of the Transoil production venture, Prime-Tass reported. Transneft has not provided any reasons for the move. Transneft has 12 percent of the joint venture, while state-owned Krasnoleninskneftegaz has 50 percent, and state-owned Proftekhkonsalt has 38 percent. Most likely, Transneft will sell its stake in the venture, a company source stated. Formed in September, Transoil would have been Transneft's first upstream project. (TSK)

WHAT'S UP? WHAT'S DOWN?
ROSOBORONEXPORT CELEBRATES FIRST ANNIVERSARY (6 November)
Celebrating its first anniversary, Russia's state arms exporter Rosoboronexport has summed up the results of the past year, PR Newswire reported. Established by Russian President Vladimir Putin, Rosoboronexport consolidated several Russian arms traders. The company's revenues year-to-date total $2.8 billion, with the full-2001 figure projected at $3.2 billion. Since November 2000, the company attracted $13.1 billion in orders up to 2006. According to the source, Rosoboronexport enjoys a constant, strong demand for its products, including MIG and Sukhoi fighters, Kamov and MI gunships, transport helicopters, S-300 air defense systems, a BUK-M1-2 Air Defense Missile System, an IGLA Portable Missile launcher, Smerch multiple-launch rocket systems, Arena active missile defense systems, a BMP-3 tracked infantry combat vehicle, Kilo-class diesel submarines, and Zubr, Murena and Chilim hovercraft, to name just a few. In addition to supplying military-grade manufactured goods and components, Rosoboronexport provides production and maintenance technologies. The company cooperates with over 60 countries on a permanent basis, and has representative offices in 33 countries. Lately, the company introduced an "oil-for-arms" plan in partnership with Russian oil and gas majors, Lukoil, Gazprom, and Rosneft. To stimulate the production and exports of Russia's military-grade products, Rosoboronexport has been authorized to participate in the creation of state holding companies that would consolidate arms manufacturers. (TSK)

LITHUANIA JOBLESS RATE UP TO 12.2 PERCENT (7 November)
Lithuania's official unemployment rate grew from 12 percent in September to 12.2 percent of the workforce in October with the number of unemployed totaling 213,534 people, Reuters reported. However, the statistics department said it revised last month's labor force data to 1.743 million people, down from the previous 1.796 million, according to which the October jobless rate would total 11.9 percent. This kept the jobless rate below the decade high of 13.2 percent it hit in February and March. In October 2000, unemployment was 11.7 percent. The labor exchange said it registered 15,765 jobs on offer in October versus 15,887 in September. In the first 10 months of 2001, the labor exchange offered 114,000 jobs, a 36.5 percent rise versus the same period a year ago. Analysts expect that economic restructuring will keep the jobless rate above 12 percent this year. (TSK)

ESTONIA CUTS GROWTH FORECAST (5 November)
Estonia's Finance Ministry cut its growth forecast for 2001 after trade figures showed waning domestic demand and a softening of demand for the country's exports, Reuters reported. Estonia's September trade deficit fell to 1.155 billion kroons ($66.88 million) from August's revised gap of 1.922 billion kroons. "The foreign trade data for September indicates a decline in domestic demand compared to August, contrary to previous months the decline affected normal imports or imported goods for domestic consumption," the Finance Ministry said in a statement. The ministry revised its forecast for gross domestic product (GDP) growth this year to 4.5 percent from 4.8 percent. The ministry and analysts said they expected a further decline in foreign trade volumes in the coming months amid falling consumer confidence and low external demand. Estonia's September exports grew a monthly 14 percent to 4.37 billion kroons for a year-on-year decline of 10 percent. Imports declined 4 percent month-on-month to 5.53 billion kroons for an annual drop of 9 percent, the statistics office said in a statement. Imports for domestic consumption decreased 5 percent, month-on-month, while normal exports, which exclude re-exports after processing, increased a monthly 7 percent. (TSK)

PROFILE
ALEKSANDR VOLOSHIN
Aleksandr Voloshin, the Russian president's chief of staff, is often called "a sugar head" by Kremlin insiders for his ability to be "a master of backstage negotiations." With few facts known about Voloshin, Russian news agency Stringer called him "a person without a biography." Voloshin was born in Moscow and raised by a single mother. He graduated from the Institute of Engineering and Transportation. Many describe him as a workaholic. "An ordinary biography of an ordinary person," Stringer said about Voloshin. However, Voloshin's commercial activity is quite extraordinary and deserves better scrutiny, the news agency stated.

Since 1993, Voloshin's business activity has been supervised by Leonid Valdman, a close ally of Boris Berezovsky and the deputy chairman of the United Bank's board. Before taking Voloshin under his supervision and control, Berezovsky had to "civilize" him a little bit, Stringer reported. In 1991, Voloshin's company, Analysis, Consultation, and Marketing together with Otari Kvantrishvili's XXI Century established an association named Inter-Ecochernobyl. According to flb.ru, in 1992 Inter-Ecochernobyl became involved in smuggling Greek brandy and rare metals. The heads of the association were named in a warrant by Interpol. It is at this time that Berezovsky interfered and "pulled Voloshin out of prison," Stringer stated. Ever since, Berezovsky used Voloshin in his financial schemes and for "dirty" types of jobs. One of Voloshin's rivals, Oleg Lurye, told "Novaya Gazeta" that, "on 23 February 1993, Aleksandr Voloshin became the head of four major companies -- Olympus, Prestige, Elite Investment Funds, and the financial company Auto-Invest. All these companies were specializing in a trivial deception of naive citizens by seizing their privatization vouchers and cash."

One of Berezovsky's schemes with Voloshin, described by Stringer, involved the illegal transfer of $5.5 million from Chara Bank into Berezovsky's accounts. The intermediary company used for the money transfer was Voloshin's ESTA Corp. Voloshin signed all the documents related to the transaction. Shortly afterwards, Voloshin joined the administration of the Federal Fund Corporation (FFC). Since its establishment in 1995, the corporation received the status of a state agent with the ability to hold auctions to privatize state enterprises. Over 60 Russian enterprises worth some 9 trillion rubles were sold through the FFC, including the major stakes in Sidanko, Onako, the Tyumen Oil Company (TNK), Gazprom, Unified Energy Systems (UES), Sibneft, and others. When the Russian Audit Chamber investigated into the activities of the FFC, many discrepancies and obvious legal violations were revealed. In the case of the Sibneft oil company, which the FFC handed over to Berezovsky and Roman Abramovich through Voloshin, the Audit Chamber wrote: "All three auctions were held with gross violations of the legislation. The members of the commission who had to represent the interests of the state openly favored companies controlled by Berezovsky and Abramovich.... Despite the violations, the auction commission headed by Malin, Sokolov, Voloshin, and others, facilitated the illegal transfer of 85 percent of the Sibneft oil company to Berezovsky and Abramovich, thus greatly damaging the federal budget."

Stringer stated that Voloshin never "played the first violin." He did not buy Russian oil giants for peanuts, neither did he privatize Gazprom or UES. Voloshin always helped others while staying in the shadow of their success. Nevertheless, in 1997 he joined then-President Boris Yeltsin's administration in the capacity of an economic assistant to then-Chief of Staff Valentin Yumashev. On 19 March 1999, Voloshin was appointed Chief of Staff to President Vladimir Putin. Since Voloshin joined the presidential administration, the so-called "gray" meetings became common. At these briefings, Voloshin usually discloses some "secret" information which is later distributed through the mass media with the reference to an anonymous source in the presidential administration. Stringer stated that Voloshin's "informational provocations" have been quite successful. Specifically, they helped in the recent dismissal of all power ministers. Some observers talk about Voloshin leaving the Kremlin. However, these rumors are circulating only within the Kremlin walls and they do not reach the general public in Russia. But Putin appears not ready to remove a close associate of his enemy, Berezovsky. Putin is concerned about leaks of sensitive and potentially embarrassing information from Voloshin. It is unclear how much longer Voloshin can keep the Kremlin at bay with enticing and juicy secrets as relationships between Russia and the U.S. continue to warm. (TSK)

IN FOCUS
TOP COMPANIES UNITE IN BILLION-DOLLAR HOLDING
A little-known firm was given effective control of some top Russian companies worth billions of dollars in the oil, metals, auto, and finance sectors in a consolidation of assets of leading Russian businessmen on 24 October. Millhouse Capital, an asset management firm, was given control of 88 percent of Russia's sixth-largest oil company, Sibneft, and 50 percent of the world's number two aluminum producer, Russian Aluminum (RusAl), Reuters reported. Millhouse will also oversee an investment of 26 percent in Russia's leading airline, Aeroflot, and a controlling stake in the country's number two automaker, GAZ. According to PR Newswire, the company will also manage a series of other investments held by Sibneft's core shareholders, including investments in the airline, electricity, automobile, pulp and paper processing, insurance, and banking industries.

The move was announced by Sibneft President Eugene Shvidler, who will be Millhouse's chairman and whose major shareholders are behind the asset management firm. Millhouse will manage the stakes, but not directly own the stocks, Sibneft said in a statement. "Millhouse aims to achieve major enhancements to shareholder value at each of the companies it manages and will also seek to expand its existing portfolio of assets," Sibneft said. Each of the group's assets will be managed as a separate profit center without any cross-subsidization. "Millhouse aims to be a major engine of growth in the Russian economy, bringing world class management and access to capital to companies with high growth potential," said Shvidler. "Millhouse will target undervalued assets where growth in shareholder value has been hindered by ineffective management, lack of investment, or bad corporate governance," he added. According to RosBusiness Consulting, the policies of Millhouse Capital will be aimed at increasing the authorized capital and purchasing new shares. The company will be using international accounting standards in its work.

The move streamlines holdings involving investment by one of Russia's best-known businessmen, Roman Abramovich, who owns 44 percent of Sibneft. The other 50 percent of RusAl is owned by the Sibal group, headed by another magnate, Oleg Deripaska. The original Sibneft announcement mentioned only itself and RusAl; however, a Millhouse source later revealed that an Aeroflot stake would also be under the asset management firm's control. The source also told Reuters that a controlling shareholding in GAZ and a "considerable stake" in regional electricity company Irkutskenergo would be run by Millhouse. The last two stakes would be run in cooperation with Deripaska's Sibal. The source added that Millhouse would run controlling stakes in one of Russia's top insurers, Ingosstrakh, in metals plant Nosta, and the medium-sized Avtobank.

Some analysts said the Sibneft move was largely neutral for the shares, which first rose but were quoted 0.41 percent down at $0.6 in later trading. Other experts stated they had expected Sibneft's shareholders to create a company to manage their swelling assets but doubted the transaction would bring more transparency. "Everything will again largely depend on the goodwill of these shareholders," said Valerii Nesterov, an oil analyst with Troika Dialog brokerage. Gennadii Krassovsky, an analyst from Nikoil investment bank, said one positive factor was that the public had finally learned exactly what assets belonged to Sibneft's shareholders. "But questions and fears will remain as minority shareholders will be keen to understand how the money is moving inside the new group," he said.

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